16/01/2012 (The Star) - The pace of inflation is expected to continue trending down with December's consumer price index (CPI) registering another drop as slower global economic growth dampens commodity prices.

The Statistics Department will release December's CPI data on Wednesday. November's CPI showed prices increased 3.3% year-on-year after climbing 3.4% in October.

Maybank Investment Bank Bhd chief economist Suhaimi Ilias, who expects prices to go up 3% in December, said this was due to the base-effect from the corresponding month in 2010 when the pace of price rises was faster.

Dass says inflation should average
2.8% this year.

“The base-effect will continue to have an impact on prices in the first half of this year as the Government has not decided to cut subsidies but this will change in the second half when the Government decides to continue with the subsidy rationalisation exercise,” he told StarBiz.

Suhaimi said opinions were still divided as to whether the central bank would cut the key policy rate, which stood at 3%, in order to support growth.

The overnight policy rate (OPR) has been kept at 3% since last May after rates were raised four times from 2% in March 2010.

“I believe the central bank will not cut the OPR in the upcoming policy meeting,” Suhaimi said. Bank Negara's monetary policy committee meets twice in the first quarter on Jan 31 and March 9.

Suhaimi said instead of a rate cut, the various Economic Transformation Programme projects would be used to stimulate the economy and boost domestic demand.

MIDF Investment Bank Bhd chief economist Anthony Dass said while prices had peaked, higher food prices would continue to post risks to inflation.

“Imported food prices are still quite high mainly due to the supply disruption as a result of the Thai floods and slight weakening of the ringgit,” he said, adding that prices would rise 3.2% for December while for 2011, inflation would average 3.2%.

Dass said for this year, inflation would average 2.8% and expects the central bank to start cutting rates in the first half of this year. “We expect a 25 to 50 basis-point cut by the first half,” he said.

Singapore-based Credit Suisse Group AG economist Wu Kun Lung said in a report that Bank Negara was expected to keep the policy rate on hold for the rest of 2012.

“The strength of domestic demand will be the main determinant of whether Bank Negara cuts the policy rate, in our view,” he said.

Wu said inflation was expected to fall below 3% in the first quarter and to about 2% by mid-year, providing room for the central bank to cut the policy rate if needed.

He added that a sharp fall in crude or palm oil prices, a eurozone financial crisis, or other shocks that were likely to weaken Malaysia's domestic demand could be the trigger for policy rate cuts.