These 3 factors will drive Malaysia's inflation towards 3% mark

But risk of a monetary action by the government looms in 2H.

According to DBS, January inflation should mark the bottom of this current declining trend. Beyond that, headline inflation is expected to trend steadily upwards.

DBS adds, persistently strong domestic demand, coupled with the wage hikes and rapid increase in property prices are stoking inflationary pressure. These factors will likely drive inflation towards the 3% mark in the coming months. 

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In fact, though market is not expecting any rate hike in the nearterm, risk of a monetary action by the central bank in the second half of the yearisrising if the authority hopes to anchor inflation expectation. Full year inflation islikely to average 2.8%, against the modest 1.7% posted last year.

Bank Negara will likely keep the Overnight Policy Rate (OPR) unchanged at 3.00% in today’s meeting on the back offavorable growth and inflation outlook.

Malaysia posted a strong showing in GDP growth in the final quarter oflast year. Headline growth rose to 6.4% YoY, from 5.3% in 3Q12. 

On the margin, growth momentum surged by a solid 8.5% QoQ saar. This is the strongest pace of quarterly growth since 2Q10, a commendable performance indeed amid a sluggish global outlook.

Separately, latestJanuary inflation registered 1.3% YoY. In fact, average inflation last year at 1.7% isthe lowest amongst the Asia ex-Japan economies. That is, benign inflation and healthy growth make for a stable monetary policy stance.

In fact, though market is not expecting any rate hike in the near term, risk of a monetary action by the central bank in the second half of the year is rising if the authority hopes to anchor inflation expectation. Full year inflation islikely to average 2.8%, against the modest 1.7% posted last year.