With the end of six straight months of deflation last December, Malaysia's Consumer Price Index (CPI) is expected to see a gradual climb in 2010, an analyst said today.

Kenanga Research economist, Wan Suhaimie Wan Mohd Saidie attributed this to a hike in domestic prices, with inflation expected to grow by 2.1 percent this year.

"In preparation for the Chinese New Year, we anticipate yet another increase in domestic prices, especially food items," he noted.

Agreeing with this, OSK Research house added that higher demand and the reduction in subsidies, would eventually lead to an increase in selling prices due to the pick up in economic activities and festivities.

"The recent 20 sen per kilo increase in sugar price and withdrawal of the subsidy on white bread may seem insignificant.

"But, we believe this could give businesses a reason to raise food and beverage prices," OSK said in a note today.

It said much of the effect of reduced subsidies would only be felt in the later part of this year.

Thus, OSK has revised its CPI forecast to 2.4 percent this year from 2.0 percent previously.

The rise in December's CPI, which was marginally higher that OSK's expectation, marks the return of positive growth in the country.

The CPI, which was up 1.1 percent year-on-year, was largely due to a slower contraction in the transportation sector of 0.9 percent year-on-year, as crude oil prices had previously slumped in December 2008, the research house explained.

The positive growth is in line with the rest of the world, with big markets such as China, India, the United Kingdom and the United States experiencing a similar increase in overall prices in December.

On the overnight policy rate (OPR), Wan Suhaimie said Bank Negara is expected to raise it, albeit gradually from mid-2010 onwards.

"Possibly by up to 50 basis points, to 2.50 percent by the year end," he told Bernama , adding that this would spur, a greater inflow of funds into the country.

It would in turn, boost demand for the ringgit, which is expected to strengthen at the 3.27 level by the year's end, he highlighted.

OSK meanwhile, also believes that the central bank will continue to hold its benchmark rate, steady at 2.0 percent in the first half of 2010.

- Bernama