KUALA LUMPUR: Inflation is likely to remain elevated but Malaysia is not expecting a recession in 2023, in line with the improvements in economic growth.

Bank Negara Malaysia (BNM) governor Tan Sri Nor Shamsiah Mohd Yunus said Malaysia has started to see signs of demand-driven inflation amid a high deposit environment.

Therefore, the central bank aims to avoid a situation where broad base price value is induced excessively as it is in higher countries, she said.

"For 2023, we do see some challenges to growth, especially from the external front with global growth slowing, but I would like to stress again that we are not expecting a recession," the governor noted.

She also said that high inflation erodes people's purchasing power and savings, so BNM is preemptively managing the risk through gradual policy rate adjustments but moderate policy movements may take time to be fully transmitted to the economy.

"We cannot wait until inflation becomes too high before we act. If that happens, the overnight policy rate (OPR) would need to be increased, much faster and by much more.

"This will hurt households and businesses even more. We conduct our multi-policy premised on us achieving price stability and sustainable growth," Nor Shamsiah said.

She added that the economy is projected to grow by 4.0 per cent to 5.0 per cent in 2023 and continues to surpass pre-pandemic levels.

Nor Shamsiah said headline and core inflation are expected to remain elevated amid both demand and cost pressures, as well as potential changes to domestic policy measures

"Headline inflation is expected to range between 2.8 per cent and 3.3 per cent in 2023.

"The balance of risk to the inflation outlook in 2023 is tilted to the upside and continues to be subject to domestic policy measures on subsidies, as well as global commodity price developments arising mainly from the ongoing military conflict in Ukraine and prolonged supply-related disruptions," she said.

Headline inflation is likely to have peaked for the year at 4.5 per cent in the third quarter this year (Q3 2022) compared to 2.8 per cent in the second quarter (Q2 2022), while core inflation increased further to 3.7 per cent versus 2.5 per cent in Q2 2022, she explained.

Nor Shamsiah said the increase in headline inflation was largely driven by the base effect from the discount on electricity bills implemented in Q3 2021, as well as sustained increases in core inflation and price-volatile items.

She also said inflationary pressures reflected the confluence of elevated cost pressures, particularly for food-related items, and strong demand conditions.

"Headline inflation is likely to have peaked in Q3 2022 and is expected to moderate thereafter, albeit remaining elevated, due to dissipating base effects and the expected easing of global commodity prices.

"Core inflation is expected to average closer to the upper end of the 2.0 per cent to 3.0 per cent forecast range in 2022, given some demand-driven price pressures amid the high-cost environment," she said.

-- BERNAMA