Despite the expectation that core prices may start to trend lower in the next few months due to a drop in prices of imported
inputs amid the strengthening ringgit and slowing global demand, risks remain skewed to the downside due to elevated
economic uncertainties. However, research house Kenanga is of the view that inflation may start to ease in 2Q23 as the new government made tackling the rising cost of living its priority while maintaining subsidies till at least the end of 2Q23. This, coupled with the eventual reopening of China and the normalisation of the supply chain may bring the CPI down to 2.5% on average in 2023.
BNM is expected to raise the overnight policy rate (OPR) by another 25 basis points in January 2023 to further realign with
the global monetary tightening trend and to curb the persistently high core inflation. However, Kenanga is currently assigning only a 50.0% probability of another similar-sized rate hike in March due to growing global economic uncertainty and a potential domestic slowdown later in the year. As such, we reckon that the terminal rate would be around 3.00 – 3.25%, in line with the long-term OPR average, after which we expect BNM to keep it unchanged for the rest of 2023.
