More OPR hike likely with pricier electricity tariff adding to near-term CPI shock

WHILE Government intervention on administered items such as chicken/egg prices and petrol/toll fees will continue to partly contain inflation in the near term, the said cannot be said of the electricity price hike which will take effect in January 2023.

CGS-CIMB Research expects the new non-domestic and non-SME (low voltage) tariffs to lead to some increase in headline inflation.

“Our calculation highlights a possibility of CPI (consumer price index) rising 10 basis points (bps) year-on-year (yoy) in January 2023F as roughly 60% of electricity users in the country are non-domestic users, and of these, 60% are non-SMEs (small medium enterprises),” projected senior economist Nazmi Idrus in an economic update.

“Electricity weight to the CPI basket is at 2.7% but the second-round effect could be slightly larger. Overall, we keep our 2023F inflation forecast at 3.0% yoy, softer relative to 2022F CPI inflation of 3.3% yoy.”

On Dec 14, Prime Minister Datuk Seri Anwar Ibrahim who is also the Finance Minister announced that only multinational and large export-oriented companies will be subjected to a slight increase in electricity tariff while households, SMEs and companies involved in agricultural and food production will be spared from such exercise.

Without subsidy, Natural Resources, Environment and Climate Change Minister Nik Nazmi Nik Ahmad has said all users in the Peninsula could face a surcharge of 27 sen/kWj from Jan 1 to June 30 which would naturally cause a rise in their living expenses.

“However, medium voltage (MV) and high voltage (HV) users among industry participants, including multinational corporations (MNCs), will face a surcharge of 20 sen/kWj instead of the full 27 sen/kWj,” he told a recent media briefing to announce the new electricity tariffs.

“The Government will subsidise RM1.93 bil in order to avoid a significant increase in the surcharge should it be passed on entirely to the users,” he said, adding that the surcharge for industries will start on Jan 1.

Against such backdrop, CGS-CIMB Research cautioned that rising core CPI may lead to further interest rate hikes in 2023F.

“November’s strong core inflation growth reflects strong domestic demand conditions during the month,” observed the research house.

“We see this as supportive of the continued rate normalisation cycle by Bank Negara Malaysia (BNM) as it has in its November statement provided a clear warning that inflationary pressures are likely to remain in 2023F, highlighting its readiness to remain hawkish if needed.”

All-in-all, the research house expects two more 25bps increases to the overnight policy rate (OPR) to 3.25% in 2023F. – Dec 30, 2022

Subscribe and get top news delivered to your Inbox everyday for FREE