Malaysia implemented a GST policy in April and inflation figures last week captured the full effect of this GST policy. In the midst of a slightly higher oil price and the addition 6% GST, we see inflation move up to 1.8%, which is below expectations of 2.2%. Considering that oil prices have yet to move up fully, Malaysia’s inflation remains in the safe range. Even if oil prices do move back up, we believe that it should still allow Malaysia’s inflation to average at a healthy 3-4% towards the end of the year. This is because Malaysia’s deflation coming from the fall in oil prices has amounted to about 3% (July’14 - Feb’15). If this happens even in the 3Q of 2015, we highly doubt average 2015 inflation would be too high.
What we believe this means is that the Bank Negara Malaysia (BNM) would likely keep interest rates unaltered. The fear of over inflation should dissipate with low inflation in April. As a result of this, the Malaysian Ringgit (MYR) should have opportunities to strengthen moving forward.
The low Malaysia inflation has primarily kept the USD/MYR from reaching back to the 6 year high of 3.72. With the recent strengthening of the dollar, the USD/MYR could have easily test this resistance again. Although we could see oil prices start to increase as we move through the year, we believe this MYR strength would be kept as there is some buffer for Malaysia’s inflation to move upwards. We believe that the 6 year high of 3.72 could be tested again, however, not from a weakening MYR but rather from a strong US Dollar (USD).
On a separate note, we are seeing a stable International Reserves of USD106.2b (as at 15 May 2015) as released from BNM. Although the reserves have dropped substantially compared to last year, we see this stability as an indication of an improving financial condition. This bodes well for the Malaysian economy and if reserves increase, we expect more confidence to return.