Malaysia’s consumer price index increased 3.4% year over year in November compared with 3.4% in October. The inflation reading was in line with expectations, per a Reuters poll. On a year-over-year basis, core inflation, which excludes prices of volatile items such as fresh food and energy, increased 2.2% in November.

Economic Scenario

The surge in consumer prices seems to be driven by an increase in oil and food prices. Oil prices have been relatively stable of late, owing to the recent supply cut extension by OPEC. Moreover, talks of OPEC working on an exit strategy for its supply cut have provided support to crude prices. Fading prospects of an abrupt end to the production cut deal when the excess inventories are cleared out led to a rally in crude prices.

Transport costs surged 10.8% year over year in November and food and non-alcoholic beverages costs increased 4.0%.

Malaysia’s Department of Statistics said that the country’s GDP grew 6.2% year over year in the third quarter of 2017 compared with 5.8% in the second quarter and 4.3% in the year-ago quarter. Malaysia’s central bank, Bank Negara Malaysia (BNM), left its Overnight Policy Rate (OPR) unchanged at 3.00% in its last policy meeting. The World Bank projects Malaysia’s 2017 GDP growth at 5.8% (read:Malaysia’s GDP at 3-Year High: ETFs in Focus).

Moreover, manufacturing PMI in Malaysia increased to 52.0 in November from 48.6 in October. A reading above 50 indicates expansion.

A Rate Hike in the Cards?

The Federal Reserve recently hiked its interest rate by 25 basis points in the December meeting. This is expected to weigh on investments in emerging economies and create pressure on various South East Asian economies to adopt a rate hike stance, in sync with the developed world.

Moreover, the recent strength in inflation might prompt Malaysia’s central bank to hike rates in 2018. The consensus on the streets is for a rate hike in 2018. “Our base case assumes BNM will raise the OPR in 1Q18, followed by an extended pause before hiking it again in 2019,” a Nikkei Asian review article citing a CIMB Investment Bank statement read.