Malaysia unlikely to cut rates despite three-year low inflation rate

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 (GST), 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 per cent consumption tax on June 1.

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

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

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

The removal of GST as well as discounts and price control measures during the Eid al-Fitr holiday season had a significant impact on prices in June, the Statistics Department said in a statement on Wednesday.

In June, costs were down across all goods and services except transportation, with the sectoral index rising 5.5 per cent 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 per cent from a year earlier, while the clothing and footwear index was down 3.1 per cent.

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

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

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

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 added.

Malaysia's central bank left its key interest rate unchanged at 3.25 per cent 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 July 11 monetary policy statement and remain on hold for the rest of the year," ANZ Research said in a note. REUTERS