The consumer price index (CPI) rose by 2.4% in June from a year earlier, the Department of Statistics said on Monday. That compares with an increase of 2.8% in May and is in line with the median forecast of 13 economists polled by Reuters. The annual core inflation rate has slowed to 3.1% (from 3.5% recorded in May). 
'Inflation rate in Malaysia has now dropped to a 14-month low', said Kar Yong Ang, the OctaFX financial market analyst, adding that it was 'certainly not the kind of macro environment that will prompt the BNM [Bank Negara Malaysia, Malaysia's central bank] to consider more rate hikes in the near-term.'
Malaysian ringgit (MYR) lost 0.1% immediately after the CPI report came out, trading at around 4.576 vs the U.S. dollar. Still, USDMYR is down almost 2% so far this month, despite the fact that BNM opted not to raise its benchmark interest rate on July 6. 'The recent strength of the ringgit has very little to do with the local factors', said Kar Yong Ang. 'USDMYR plunged primarily because disinflationary trends in the U.S. have accelerated and the Fed [Federal Reserve, the U.S. central bank] is now widely expected to deliver just one more rate hike this year', he added.
The question now is—can BNM afford to pursue a less aggressive or more dovish monetary policy? Has BNM reached a peak in rates and can it now consider to focus on rate cuts? Not so fast, the analysts claim. Rate cuts are normally associated with an imminent recession or declining economic activity, which is not currently observed in Malaysia. Industrial output surged 4.7% y-o-y in May, while trade balance improved to +25.8 billion USD in June.
'I think that BNM is certainly pleased to see price pressures ease, but core inflation is still above 3.0%, which is not entirely comfortable', said Kar Yong Ang. 'The economy is not doing all that bad, but I think BNM will just stay on the sidelines for now, observing how the situation unfolds. It is too early to relax and turn dovish', he added.
Like every other central bank, BNM officials will watch carefully the Fed's press conference this Wednesday for any cues on the trajectory of rate hikes in the near term. 'Forward guidance will be key. If the Fed claims that inflation is under control, the market might interpret it as a dovish sign and then the ringgit might appreciate, with USDMYR falling towards 4.500 and possibly lower', said Kar Yong Ang.
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