Malaysia’s annual inflation rate slowed to 1.2 percent in December, the lowest since February 2010, official data showed yesterday, but analysts expect the central bank to leave interest rates unchanged at a policy meeting at the month-end.

The December rise in the consumer price index slowed from November’s 1.3 percent increase. A Reuters poll had forecast a 1.4 percent rise, factoring in year-end festive demand.

Prices of food, alcoholic beverages and healthcare rose while clothing and communication fell, according to data from the Statistics Department.

The South-East Asian country has one of the lowest inflation rates in the region, thanks to government subsidies on essential items ranging from cooking oil to sugar.

But economists expect inflation to pick up faster this year, leaving behind its modest levels in 2012 as a global economic recovery leads to inflationary pressures.

“Our scenario is still in line with the view that inflation will tick higher in 2013. Among others, higher commodity prices, strong domestic demand are part of the reason behind this,” said OCBC economist Gundy Cahyadi in Singapore.

The Malaysian government is also widely expected to slowly introduce subsidy cuts in 2013 in a move to cut a ballooning budget deficit to 4.0 percent of gross domestict product this year from 4.5 percent in 2012.

The subsidy cuts have been delayed due general elections, which must be called by end-April.

Despite currently low inflation, Analysts do not expect the central bank to tweak interest rates until well into the second half of the year.

“Bank Negara is likely to maintain a stable policy rate for now, as we see fairly balanced risks from the growth-inflation front, even if we expect inflation to inch higher to 2.9 percent year-on-year in 2013,” Gundy added.

“Our inflation projection, we think, remains within the comfort zone of the central bank at this juncture and as such, we see little panic to make any move in the medium-term.”

- Reuters