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       PETALING JAYA: The recent floods in Malaysia may cause the prices of goods to rise even higher, at a time when businesses are transferring their surging production costs to consumers.

       As price pressure picks up amid a slow economic recovery, some economists expect Bank Negara to raise the interest rate in 2022 to tame the inflation.

       The government, which is already heavily subsidising RON95 petrol and diesel, may need to step in to mitigate the rising price impact on the public.

       However, MIDF Research said the government has enough fiscal bullets to contain inflation particularly via its subsidy approaches.

       Yesterday, TA Securities Research said the country’s inflation in December is forecast to rise by more than 3% year-on-year (y-o-y), following a 3.3% increase reported in November.

       This is due to the growing demand for most goods on top of sustained supply chain disruptions and delivery delays, greater pass-through of accumulating business costs to consumers and higher transportation costs.

       In addition, TA Securities Research said concerns over bad weather and recent floods in Malaysia may lead to higher prices of goods in Malaysia.

       Bank Negara may raise rates to tame inflation

       “Our observation from flood events since March 2006 to January 2021 concluded that there is an impact of floods on the performance of selected variables in the short term.

       “Flood shocks tend to negatively impact gross domestic product growth rates as it recorded a lower average of 0.6% quarter-on-quarter (q-o-q) during the events period, compared with 2% q-o-q gain previously.

       “Other macroeconomic impacts of flood events also showed a contraction of exports performance with an average of negative 1.4% month-on-month (m-o-m) during the same period, followed by higher inflationary pressure at 0.5% m-o-m and muted industrial production,” it said in a note.

       Meanwhile, MIDF Research said it could take until the middle of 2022 for the input or production cost inflation to soften gradually.

       The expected normalisation is due to the fading low-base effect and the reducing disruptions in the global supply chain.

       “However, the emergence of the new Covid-19 variant remains a downside risk to the global economy, given that it may affect the recovery phase in the supply chain and normalisation process in commodity prices,” MIDF Research said in a note.

       The research house noted that the producer price index inflation broke a new record in October, increasing at 13.2% y-o-y as compared to 12.3% in September.

       By stage of production, cost of crude materials rose by 40.4% y-o-y, the fastest pace in five months.

       At the later stage, intermediate materials are also facing higher input inflation, registering a new record high of 11.7% y-o-y in October.

       “On the flip side, the cost of finished goods is contracting at a marginal pace, dragged by capital equipment,” according to MIDF Research.

       It added that tightening of monetary policy is likely to take place next year, amid recovery in domestic demand and the labour market continuing smoothly.

       CGS-CIMB Research also expects Bank Negara to increase its overnight policy rate (OPR) next year.

       “With the resumption in economic activities, we foresee Bank Negara raising the OPR by 50 basis points in the second half of 2022 to 2.25%,” it said.

       Currently, the OPR is at a record low level of 1.75%.

       “We expect headline inflation to remain moderate at 2.4% y-o-y in 2021 and 2.2% in 2022, with an uptick in core inflation as domestic demand strengthens,” stated CGS-CIMB Research.