MIDF Revises 2024 Inflation Rate Forecast to 2.7 Percent

KUALA LUMPUR: MIDF Research has revised its overall inflation rate forecast for 2024 to 2.7 percent from the previous 3.2 percent. This revision follows expectations of a phased implementation of targeted fuel subsidies and moderate food price growth.

According to the research firm, the launch of targeted fuel subsidies is expected to begin in the fourth quarter of this year, revising the initial projection of implementation in June.

“We believe the government may need more time to align the subsidy distribution mechanism and fuel pricing,” MIDF Research stated in a research note today.

Earlier today, the Department of Statistics Malaysia announced that the national inflation rate remained at 1.8 percent in April 2024 for the third consecutive month.

MIDF Research noted that in the first four months of 2024, the overall inflation rate averaged 1.7 percent compared to 2.5 percent in 2023, while non-food inflation stood at 1.5 percent (2023: 1.3 percent) and food inflation at 1.9 percent (2023: 4.8 percent).

The average core inflation rate was 1.8 percent (2023: 3.0 percent).

Meanwhile, the country’s Producer Price Index (PPI) surged to its highest level in 15 months in March 2024 due to an increase in input inflation of 1.6 percent year-on-year.

Following the rise in global oil prices, raw material input costs increased by 7.4 percent year-on-year, marking the fastest rise since July 2022.

“Going forward, we expect the PPI to be on an upward trend, particularly through intermediate materials, fuels, and lubricants, following the anticipated start of the targeted diesel subsidy mechanism in June 2024,” MIDF Research added.

Meanwhile, OCBC Bank noted that with overall inflation averaging 1.7 percent year-on-year so far, there is a risk to the full-year 2024 average overall inflation forecast of 2.5 percent year-on-year.

“In this context, the duration and mechanism of targeted fuel subsidy rationalization need to be clarified,” OCBC Bank stated.

Evaluating the country’s fiscal position, OCBC highlighted that after considering announced, implemented, and planned measures, the fiscal deficit is projected to be 0.5 percentage points smaller than the Gross Domestic Product (GDP) this year compared to 2023.

“Diesel subsidies, if implemented in June and depending on the mechanism, could save 0.1 percent of GDP in 2024, while electricity subsidies are expected to save 0.2 percent of GDP, and new tax measures are anticipated to generate 0.2 percent of GDP,” OCBC added.

The government aims to reduce the fiscal deficit to 4.3 percent of GDP this year from 5.0 percent in 2023.

OCBC noted that fiscal consolidation is clearly on the right track, but it remains to be seen whether the deficit target can be achieved.

Regarding the Overnight Policy Rate (OPR), OCBC stated that Bank Negara Malaysia is expected to keep its policy rate unchanged at 3.00 percent throughout this year.

“Details of the targeted fuel subsidy rationalization indicate the government aims to manage inflationary impacts. The risk, albeit small, is that if inflationary pressures persist and become widespread, rate hikes may come back into discussion,” OCBC concluded.