KUALA LUMPUR: The growth recovery during the second half of the year can begin to build up underlying inflationary pressures in the Malaysian economy, HSBC Bank says.
“We see some upside risks to inflation emanating from robust domestic demand,” it said yesterday.
High oil price concerns have risen again, although the initial impact will mostly be on the subsidy bill.
Since the peak of 3.5 per cent in June 2011, headline inflation in Malaysia had come down considerably to 2.2 per cent in February this year. “This is largely a result of a high base last year, but pent-up inflation pressures are still brewing due to lack of adjustment in controlled prices,” the bank said.
HSBC expects domestic demand to hold up this year (3.7 per cent growth), supported by favourable labour market conditions, accommodative monetary policy settings, and election-related fiscal stimulus.
It also expects more investment projects to be rolled out under the Economic Transformation Programme.
“While domestic demand should provide some cushion, it cannot prevent an overall slowdown in GDP (gross domestic product) growth.”
Cooling global growth over the coming quarters should help reduce demand-led inflationary pressures.
However, with oil prices high and subject to upside risks due to geopolitical factors, there are inflation risks from this front, it added.
Bank Negara Malaysia is also sounding less dovish as it has taken some comfort from recent tentative signs of stabilisation, it said.
The central bank expects rates to remain on hold this year and tightening to begin next year.
On the fiscal policy front, the government is targeting deficit reduction to 4.7 per cent from an estimated 5.4 per cent, but HSBC thinks the fiscal reins could be loosened in the run-up to the general elections.