Malaysia's August inflation may have slowed slightly

KUALA LUMPUR: The median of economists' forecast is 3.3 percent year-on-year vs 3.4 percent in July. Forecast range of 18 economists was 3.2 to 3.4 percent.

FACTORS TO WATCH:

Inflation in Malaysia may have slowed a touch in August on lower commodity prices.

The polled estimate is 3.3 percent. The central bank's annual forecast for inflation is between 2.5 percent and 3.5 percent this year.

Prices in Malaysia may not have risen much during the festive season of Eid, which typically pushes up food prices in Islamic nations.

This is because of price controls instituted by the government to prevent profiteering and sharp spikes in prices of household items.

"Transport inflation may also continue easing, given the higher base from fuel price adjustments last year," Hak Bin Chua of Bank of America-Merrill Lynch said in an email to Reuters.

Economists expect inflation to have peaked in June, when it was recorded at 3.5 percent, partly due to an electricity tariff hike.

Going forward, economists expect inflation to moderate as the slowdown in global economy will spill-over into domestic growth prospects.

Bank Negara earlier this month said inflation was expected to remain relatively stable for the rest of the year.

Malaysia's annual economic growth slowed to 4 percent in the second quarter from 4.9 percent in the first quarter, weakened by the global slowdown and moderation in public spending.

Malaysia's central bank kept its key interest rate unchanged at 3.00 percent earlier this month, pausing to assess the extent of the global slowdown, and economists predict that it would stand pat for the rest of 2011.

MARKET REACTION

Markets are likely to shrug off the numbers if they come within the forecast range, as that reinforces expectations that inflation will moderate for the rest of the year. Easing inflation and slowing economic growth will give Bank Negara room to leave rates on hold in its next monetary policy meeting in November.

The rates market in Malaysia reflects some shifting expectations for policy rates, with increasing receiving interest in the swaps market suggesting a dovish outlook and causing shorter-term tenors to come down.

However, in the currency forwards , the three-month contract beginning three months from now is at 3.36 percent, pointing to expectations of another rate hike.

An FX strategist said the market expects the central bank to hold rates in November.

Copyright Reuters, 2011