Bank Negara has policy space as inflation remains contained: Economists

New Straits Times

24-05-2025

KUALA LUMPUR: Bank Negara Malaysia may have room to ease interest rates in the coming months as inflationary pressures remain contained and external economic headwinds build, economists said.
April's consumer price index (CPI) data showed that headline inflation held steady at 1.4 per cent year-on-year, unchanged from March, despite festive-season spending during Hari Raya.
Core inflation, however, inched up to two per cent, the highest in 17 months, driven by firmer price pressures in services and durable goods.
Putra Business School economic analyst Prof Dr Ahmed Razman Abdul Latiff said the benign inflation backdrop, coupled with rising global risks, supports the case for a potential 25 basis-point reduction in the Overnight Policy Rate (OPR) in the second half of the year.
He pointed to geopolitical tensions and reciprocal tariff measures by the United States (US) as key threats to global trade, which could spill over into Malaysia's export-oriented economy.
Still, Razman expects domestic growth to remain resilient.
"Despite all the uncertainties caused by US tariffs, the economic outlook for the second half of the year remains positive, supported by stronger trade activity and expected higher foreign direct investments," he told Business Times.
He added Malaysia's chairmanship of Asean this year is also expected to lift domestic demand through enhanced regional collaboration.
According to the Department of Statistics' (DOSM) report on Wednesday, price increases in April were led by personal care and housing costs.
Personal care saw the sharpest rise at 4.1 per cent, while education and housing expenses increased between 2.0 and 2.3 per cent.
Food and beverage inflation eased slightly to 2.3 per cent from 2.5 per cent a month earlier, helped by lower vegetable and dairy prices despite festive demand.
Bank Muamalat Malaysia Bhd chief economist Dr Mohd Afzanizam Abdul Rashid said while inflation is largely under control, Bank Negara may soon need to pivot its policy stance if growth slows meaningfully.
"The current economic environment is highly fluid, which necessitates a careful and well-calibrated monetary policy response," he said, adding that a rate cut of 25 basis points could be considered if signs of a slowdown persist.
He said gross domestic product growth in the second half could dip below four per cent, warranting policy support.
This outlook is consistent with Hong Leong Investment Bank (HLIB) economist Felicia Ling's view that the inflation environment remains relatively benign.
"Recent data suggests a benign domestic inflation with minimal inflationary pressures, leaving Bank Negara more room for monetary easing," she said in a research note.
HLIB has maintained its full-year CPI forecast at 2.7 per cent but cautioned that global demand weakness and subdued commodity prices pose downside risks.
Maybank Investment Bank chief economist Suhaimi Ilias said broader inflation trends have remained muted despite policy changes.
"Inflation remains subdued at sub-two per cent year-to-date even with the 13.3 per cent minimum wage hike in February," he said.
He added that the limited price pass-through may be attributed to the hike's initial application only to large employers.
Meanwhile, DOSM said deflation persisted in certain segments, led by a 4.5 per cent fall in information and communication and a 0.1 per cent dip in clothing and footwear.
Public Investment Bank economist Sabrina Edora said while inflation will likely stay below three per cent for the year, risks could emerge from domestic policy shifts. These include fuel subsidy reforms and a wider service tax net.
Still, she believes any inflationary impact will be manageable if such reforms are introduced gradually and supported by offsetting measures.
"Given the backdrop of lower global commodity prices, the near-term inflation trajectory is expected to remain benign, even in the event of subsidy rationalisation," she said.
Bank Negara's latest monetary policy statement projected headline inflation to average between 2.0 and 3.5 per cent this year, with core inflation between 1.5 and 2.5 per cent.
With three policy meetings left in 2025, in July, September and November, economists say the central bank has policy space if conditions deteriorate.
A 25 basis-point cut in the third quarter is still on the table, Edora said, assuming stable macroeconomic conditions and continued electricity tariff subsidies.