Following a sustained increase in global and regional inflation as well as a spike in June’s consumer price index (CPI) in Malaysia due to a significant removal in fuel subsidy that triggered a 41% and 63% hike in petrol and diesel prices respectively, MARC foresees higher average inflation rate of 5.8% in 2008, up from its previous estimate of a 5%.  Sharp increases in the sub-indices of transport and food & non-alcoholic beverages by 19.6% and 10% on a year-on-year basis are expected to persist in the remaining part of the year as the impact of rising cost of food and fuel continues to filter through the economy.

While the CPI has risen by an average rate of 3.7% in the 1H2008, the index is expected to climb at a faster pace of 7.9% in the 2H2008, giving an average of 5.8% for the whole year.  The two major sub-indices which will likely put upward pressures on the overall CPI in the near term are food & non-alcoholic beverages and transport. 

Due to higher-than-expected inflation in Malaysia and in the region as well as major developed countries in recent months, MARC sees an increasing risk of Bank Negara Malaysia hiking the Overnight Policy Rate (OPR) despite maintaining its expectation of a 3.5% rate for the rest of the year at this juncture.  The outcome, however, may depend on the details of the second quarter GDP growth statistics.  Should the economy continue to post a higher-than-expected growth which would lead to a continuous rise in capacity utilization of the manufacturing sector as well as emergence of demand-pull factors in the economy, a monetary policy response is expected in the near future.