KUALA LUMPUR: Malaysia's inflation remains the lowest in Asean, thanks to generous subsidies on petrol and food, but the momentum has accelerated.

The country's core inflation would likely remain sticky and high in the near term, according to HSBC Global Research team.

HSBC co-head of Asian research Frederic Neumann said Malaysia's core inflation had recently overshot 4.0 per cent year-on-year, reflecting booming local demand.

"A large part of the inflation trajectory in 2023 will depend on the new budget, which Prime Minister (Datuk Seri) Anwar Ibrahim has signalled may stay largely in line with previous announcements

"All in all, we believe core inflation will likely remain sticky and high in the near term, and, as such, we recently upgraded our average core inflation to 3.0 per cent for both 2022 and 2023," Neumann said at HSBC Global Research's webinar on 2023 Asian economic outlook today.

Malaysia has been providing considerable fiscal subsidies to tame inflation, thanks to its "windfall" revenue from high commodity prices.

However, this comes at a fiscal cost.

HSBC noted that Malaysia had been running an average deficit of around 6.0 per cent for three years.

"Before the election was called, the budget presented by the last government was expecting a fiscal deficit of 5.5 per cent of GDP (gross domestic product) in 2023, a slight reduction but still elevated.

"Now with Anwar in office, a new budget will soon be tabled and fiscal policy will be in the spotlight. The PM's recent remarks suggest that the new budget may broadly remain the same, implying that the extent of providing more targeted subsidies, if any, will likely be small," HSBC said.

On the monetary policy front, HSBC expects Bank Negara to deliver three 25 basis points (bps) rate hikes until the second quarter of 2023, bringing its policy rate to a historic high of 3.5 per cent.

Uncertainty persisted as the extent of subsidies would largely determine where inflation headed to in 2023, it said.

If the removal of broad-based subsidies pushed up inflation sharply, Bank Negara would likely have to deliver bolder hikes. But if growth slowed at a faster-than-expected pace, the central bank might not be shy in pausing earlier than expected.

On the regional front, HSBC expects 2023 to begin on a softer note after the resilience the Asian region had shown last year, with most Asian economies managing to eke out respectable rates of growth.

This was attributed to the lagged impact of surging living costs, soaring interest rates and wobbly demand in China finally punching through.

However, it expects a swift rebound in mainland China by mid-year, led by pent-up consumer demand and a stabilising housing market, which should provide a lift throughout the region.

By then, central banks elsewhere will also have ended their tightening cycles, with some even looking to cut rates again to cushion growth.

"The year will start off on a backfoot with global trade cycle and weaker economic growth challenges in China, By the second quarter, economic stabilisation will set in, led by domestic demand in mainland China led by consumption and construction, driving GDP growth back to 5.0 per cent." Neumann said.

He added that although the year might not deliver the fastest economic growth, it would make steady determined process.