Malaysia's June Inflation Rate at 3-Year Low, but Rate Cut Unlikely

Malaysia's annual inflation rate slowed to its lowest in more than three years in June, after the government abolished a goods and services tax, but economists said this was unlikely to lead to any change in monetary policy. (Reuters Photo/Thomas White)

By : Rozanna Latiff | on 6:00 AM July 19, 2018
Category : International, SE Asia

Kuala Lumpur. Malaysia's annual inflation rate slowed to its lowest in more than three years in June, after the government abolished a goods and services tax, but economists said this was unlikely to lead to any change in monetary policy.

The new government led by Prime Minister Mahathir Mohamad, put in office after the May 9 general election, scrapped the 6 percent consumption tax on June 1.

The goods and services tax (GST) is expected to be replaced by a reinstated sales and services tax (SST) on Sept. 1.

June's annual inflation rate was 0.8 percent, the lowest since February 2015, when it stood at 0.1 percent.

The figure was well below the 1.3 percent forecast by a Reuters poll and sharply down from May's 1.8 percent.

The removal of GST as well as discounts and price control measures during the Idul Fitri holiday season had a significant impact on prices in June, the Statistics Department said in a statement on Wednesday (18/07).

In June, costs were down across all goods and services except transportation, with the sectoral index rising 5.5 percent from a year earlier due to higher domestic fuel prices, data from the department showed.

The biggest declines were seen in non-food consumer goods and services. The communications index fell 3.9 percent from a year earlier, while the clothing and footwear index was down 3.1 percent.

On a monthly basis, the inflation rate declined 1.2 percent in June.

Under SST, services would be taxed at 6 percent, while the goods tax would be set at 10 percent.

The extent of moderation in inflation would depend on the impact of the SST, UOB economist Julia Goh said.

As it covered a smaller range of goods and services compared to GST "headline inflation should remain moderate after SST is reintroduced in September," she said.

Malaysia's central bank left its key interest rate unchanged at 3.25 percent in its July 11 review, citing slowing inflation and steady economic growth.

Economists have forecast that Bank Negara Malaysia (BNM) would hold its interest rate for the rest of the year, with the possibility of easing if inflation slows further.

"Given low inflation and uncertainty over the global trade outlook, we expect BNM to maintain the "neutral" tone it assumed in the 11 July monetary policy statement and remain on hold for the rest of the year," ANZ Research said in a note.

Reuters

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