With GST scrapped, Malaysia's inflation expected to decline

KUALA LUMPUR • Malaysians, who already enjoy one of South-east Asia's lowest inflation rates, are getting an added boon with the removal of a consumption tax.

A 6 per cent goods and services tax (GST) was scrapped this month by Prime Minister Mahathir Mohamad to meet an election pledge and a replacement sales levy will not be introduced until September. The new government is also subsidising some domestic fuel prices for the rest of the year.

That is putting downward pressure on inflation and giving Bank Negara Malaysia scope to keep interest rates on hold after an early hike in January.

Economists like Mr Khoon Goh at Australia & New Zealand Banking Group have slashed their inflation projections to 0.7 per cent this year from 2.7 per cent previously.

The timing could not have been better for the central bank, which is facing a period of uncertainty following the sudden resignation of governor Muhammad Ibrahim and with no successor named yet.

A slowdown in inflation gives the Malaysian central bank some respite as its counterparts in Asia scramble to tighten monetary policy amid a rout in emerging-market currencies.

"These are very significant policy moves," said economist Euben Paracuelles at Nomura Holdings in Singapore, who cut his 2018 inflation forecast to 1.3 per cent from 2.5 per cent. "With inflation coming in even lower, we think the rate hike they did earlier was a one and done, though that will ultimately depend on the new governor."

Former central bank deputy governor Nor Shamsiah Mohd Yunus is widely tipped to replace Mr Muhammad, who left under a cloud when questions were raised about the bank's role in a land purchase deal linked to the troubled 1Malaysia Development Berhad state fund.

The tax move will not show up in the May inflation figures reported yesterday, with consumer prices rising 1.8 per cent from a year ago, pushed up by higher transport costs.

In March, the central bank's projected inflation will average 2 per cent to 3 per cent this year. ANZ trimmed its 2019 inflation forecast to 1.7 per cent from 2.9 per cent.

A month into office, Tun Dr Mahathir has moved swiftly to fulfil campaign promises which included scrapping the GST.

The government is setting aside RM3 billion (S$1 billion) for the rest of this year to subsidise some pump prices, Finance Minister Lim Guan Eng said this month.

Bank Negara in January was one of the first to raise interest rates in Asia. The majority of economists surveyed in May and June predict the key rate will remain at 3.25 per cent until the end of the year.

Still, a windfall for consumers is not a done deal. Some business owners may hold back on passing the full cost savings to consumers until they get details of the replacement levy.

A restaurant in an affluent neighbourhood in Kuala Lumpur was issued a warning by the authorities this month after it raised prices.

Prices on "certain types of services which are linked to tourism, entertainment and travel would definitely come off because that's a very straightforward impact", said economist Rahul Bajoria at Barclays in Singapore.

Items like food might take a little bit longer to reflect the change because of existing inventory that drew GST, he said.

It is also cumbersome to drop prices just to raise them again when the sales tax kicks in later, he said. "It could be the case that the impact may not be as large as it was when the GST was being imposed," he added.


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A version of this article appeared in the print edition of The Straits Times on June 21, 2018, with the headline With GST scrapped, Malaysia's inflation expected to decline. Subscribe