Malaysia's low inflation expected to persist

The Star

21-07-2025

PETALING JAYA: Malaysia's inflation rate is expected to remain low, with economists projecting the headline rate to hold at just 1.2% in June 2025.
This expectation comes ahead of the Statistics Department's release of the consumer price index (CPI) data for June, due later today.
Recall that Malaysia recorded an inflation rate of 1.2% in May 2025, marking the lowest level in 51 months, with the CPI rising to 134.4 from 132.8 a year earlier.
As for June, seven of the 16 economists polled by Bloomberg are expecting CPI to grow by 1.2% year-on-year, suggesting continued softness in price pressures amid a relatively stable cost environment.
Speaking to StarBiz, Bank Muamalat Malaysia Bhd chief economist Mohd Afzanizam Abdul Rashid expects the headline inflation rate to remain unchanged from May, supported by minimal policy-driven price pressure and a stronger ringgit.
'Policy changes in respect to tax and subsidies have been quite measured.
'The appreciation of the ringgit also helped to contain the imported price appreciation,' he explained.
On the anticipated RON95 fuel subsidy rationalisation, Mohd Afzanizam believes the impact will be manageable if implemented through a targeted approach.
'It really depends on the mechanism.
'I suppose targeted subsidies would limit the impact, and we have seen how cash assistance such as the Sumbangan Asas Rahmah initiative has been disbursed via MyKad successfully,' he said.
'As such, the impact from the RON95 subsidy rationalisation is expected to be manageable,' he added.
The RON95 targeted subsidy was supposed to be implemented in the second half of this year.
However, Communications Minister Datuk Fahmi Fadzil announced yesterday that the implementation has been slightly delayed due to the need for a more detailed review of the mechanism.
This delay provides a short reprieve from price pressures, as it was previously expected that a targeted fuel subsidy would raise the country's inflation.
Mohd Afzanizam also said the recent 25-basis-point cut in the overnight policy rate (OPR) to 2.75% is unlikely to trigger inflationary pressure.
'The context for the OPR adjustment was to stimulate the economy preemptively in light of possible shocks from the US tariffs from Aug 1.
'On that note, we do not think the OPR decision can be inflationary,' he said, adding that the current low inflation rate provides Bank Negara room to ease policy.
In a monetary policy statement, Bank Negara projected average inflation of between 2% and 3.5% in 2025.
Additionally, the inflation outlook remains subject to global commodity prices, domestic policy changes and exchange rate developments.
Sharing a similar view on price stability, Socio-Economic Research Centre executive director Lee Heng Guie also expects inflation to hold steady at 1.2% in June.
However, he said recent tax reforms may gradually raise price levels in the coming months.
'The expanded sales and service tax (SST) will have a small direct impact on the CPI in July as essential items remain SST-exempt,' he said.
Lee added that while the direct price effect will be limited, the tax expansion may have indirect consequences on costs.
'There will be an indirect impact by increasing the cost of production and ultimately affecting the prices of goods and services,' he said.
He estimated that the SST expansion will likely add around 0.25 percentage points to the overall inflation rate in 2025.
On the subsidy front, Lee views the upcoming RON95 fuel subsidy reform as a potential inflation variable, though he expects the impact to be contained.
'The impending implementation of RON95 fuel subsidy rationalisation remains a wild card, though 85% of total households will not be impacted,' he said.
Regarding monetary policy, Lee believes the recent OPR cut is unlikely to change short-term inflation dynamics.
'The rate adjustment is more about supporting growth than containing inflation,' he said.
Meanwhile, economist Geoffrey Williams expects inflation to remain low for the rest of the year, backed by modest domestic demand and the absence of major cost shocks.
'Headline inflation has been below 2% since July 2023 and fell to 1.2% in May.
'There have been no particularly inflationary issues during the year.
'So, we expect inflation to remain low, around 1.2% to 1.4%, in June,' he said.
Looking ahead, he anticipates only a modest uptick in price levels in the second half of the year (2H25).
'For 2H25, there may be some uptick in inflation, but overall it will remain low, between 1.5% and 2%,' he said.
Williams said the central bank's decision to lower interest rates will not have a major inflationary effect.
'The cut in OPR is accommodating growth risks but should not add to inflation,' he said.
He also noted that the inflationary impact of subsidy reform may be deferred.
'The RON95 subsidy rationalisation has now been delayed, so this effect will be pushed forward,' he stated.
On the SST, Williams believes the impact on prices will depend on how businesses respond. 'The SST changes should not add too much to inflation unless businesses pass on costs to consumers.
'So people should be vigilant and avoid products from companies passing on costs unnecessarily,' he said.
Williams also offered a more optimistic outlook on the full-year inflation trajectory compared to the central bank's projection.
'The official forecast of 2% to 3.5% for the full year is pessimistic, and it is likely that the full-year outcome will be closer to 2% or below,' he added.