Cautious spending likely in 2H

PETALING JAYA: The inflation rate, which hit a 51-month low of 1.2% last month, will certainly raise the question of whether the time is ripe for the central bank to cut interest rates in the near future.

However, it is also important to consider if lower inflation rates might continue into the rest of the year, particularly as the expanded sales and service tax (SST) takes effect next month.

Economist Geoffrey Williams said he expects inflation to come out broadly at or below 2%, adding, however, that there are still risks due to subsidy rationalisation, the impending SST and ongoing geopolitical uncertainties.

“While I expect the domestic factors to affect inflation only modestly, the geopolitical impact on supply chains and oil prices is difficult to predict. Nonetheless, with domestic inflation holding low and steady, it provides the green light for the RON95 subsidy rationalisation,” he told StarBiz.

Tradeview Research senior analyst Tan Jia Hui, meanwhile, said that core inflation, which doesn’t include volatile items like fuel and food, is slightly elevated.

“This is mainly because wages have gone up and some businesses, especially in services, are passing on the higher cost to consumers. As the economy gradually recovers, this trend is likely to continue,” she said.

However, Tan cautioned that overall domestic demand is not too strong, noting that the government is still subsidising essentials like fuel and selected food items, which helps keep overall inflation in check.

“Some of the key risks to this outlook include the potential weakening of the ringgit in the second half of this year (2H25) if global risk aversion spikes. Weather-related disruptions could push up food and commodity prices and higher prices from key trade partners could also lead to more imported inflation,” Tan said.

According to the Statistics Department, the consumer price index (CPI) stood at 134.4 last month, compared with 132.8 a year ago. It said the food and beverage group, which contributes 29.8% to the CPI, rose more slowly at 2.1% in May 2025 versus 2.3% in April 2025.

While the food-at-home subgroup did not register any changes for May 2025 compared to April 2025, the food-away-from-home subgroup was up 4.4% versus 4.3% in the preceding month.

A number of other groups had recorded a higher increase in May compared to the month before, including restaurant and accommodation services, health and furnishings, household equipment and routine household maintenance.

The information and communication and the clothing and footwear groups remained in negative territory, registering 5.2% and 0.2% declines, respectively.

As the SST deadline draws closer, Williams said the impact of the tax regime will be very moderate and most people will be unaffected.

Tan, who expects some impact, said consumers, especially in the M40 group, will reduce their discretionary spending, leading to a more cautious consumption pattern in 2H25.

She added cost pressures are likely to grow, diminishing purchasing power and discretionary spending.

“However, essentials remain largely unaffected, so the broad-based impact on cost of living is expected to be modest. For businesses, firms in the services and logistics sectors may experience higher operating costs like higher rental or leasing, especially those with limited ability to pass through these costs,” Tan explained.

For small and medium enterprises, she said, the cost of compliance and potential loss of competitiveness could be a concern.

“On the positive side, clearer tax treatment and improved government revenue could enhance fiscal consolidation credibility, indirectly supporting business sentiment,” she said.

With rising geopolitical and trade uncertainties, disruptions in raw materials or intermediary goods may also increase input costs, higher freight and shipping costs.

Tan said a potential rise in commodity prices like oil, palm oil and metals due to conflict-related supply constraints can further add inflationary pressures.

“The ringgit could come under pressure if global risk sentiment deteriorates, making imports costlier. Consumers may face higher prices on imported goods and imported inflation via the weak ringgit. Businesses may face margin pressures, particularly export-reliant sectors sensitive to US-China dynamics. On the flip side, trade diversion could benefit Malaysia in select sectors such as semiconductors, and electrical and electronics if it attracts more supply chain relocations.”

Meanwhile, with inflation rates at a much lower level, it is safe to say that there is less pressure on Bank Negara to cut rates as it sees more stability.

Kenanga Investment Bank Bhd said while market consensus has implied that the central bank might impose one or two rate cuts in 2H25, it maintains that interest rates will remain unchanged.

In a report, the research house said inflation is expected to rise gradually on the back of structural reforms, while economic growth remains resilient.

“The current rate level continues to attract foreign capital into the bond market. That said, should growth fall below 3.5% and sequential quarter-on-quarter gross domestic product (GDP) prints turn negative, the case for a rate cut would strengthen,” it noted.

Separately, CIMB Investment Bank Bhd said it expects the Overnight Policy Rate (OPR) to be cut in July, as Malaysia’s exports contracted 1.1% in May 2025, falling short of expectations and reflecting intensifying external headwinds.

“Given subdued inflation trends, coupled with weak external trade, we maintain our call for Bank Negara to cut the OPR by 25 basis points to 2.75% at the upcoming Monetary Policy Committee meeting to support growth.

“However, Bank Negara may prefer to assess additional key upcoming data. This would be consistent with the central bank’s data-dependent approach to monetary policy.”