Headline inflation in September rose below expectation, up 1.1% y/y from 1.5% y/y in August (consensus: 1.3% y/y) as most of the components in the CPI basket grew at a slower pace. Today, with the distortion of consumption tax at the back of our mind, our focus is on the economic fundamentals i.e. demand and supply. Upwards price pressures coming from food due to supply disruption as a result of flash floods remain. The introduction of the departure levy has added some upwards pressure on air passenger transport prices in September. But the low fuel and transport prices will continue to put a lid on the overall upside pressure on headline CPI.

For 2019, the overall inflation is projected to be around 0.8%. Low inflation is partly due to weak domestic spending. This is reflected by the wage growth that has been easing in 2019. Looking ahead in 2020, we project inflation to be around 2%, partly driven by the low-base effect. And based on the current inflation data, it clearly suggests there is ample scope for BNM to reduce rates by 25bps from the current 3.00% OPR during the 5 November Monetary Policy Committee (MPC) meeting. Nevertheless, the economy has outperformed its Asian neighbours in 1H2019 and is projected to grow at a sustainable pace in 2020 as pointed out in Budget 2020. Taking this into account, our probability for a rate cut has dropped from almost certain to now only 60% in the 5 November MPC meeting.

• Headline inflation in September rose below expectation. In September, consumer price index (CPI) rose by 1.1% y/y from 1.5% y/y in August (consensus: 1.3% y/y). Most of the components in the CPI basket grew at a slower pace.

• Food, housing and transport, combined, accounts for 69% weight in the CPI basket, and all reported lower inflation in September. Thus, core inflation (minus fresh food items and administered goods and services) grew at a slower pace by 1.5% y/y from 2.0% y/y in August.

• September’s inflation is a reflection of what happened a year ago (September 2018) which is the consumption tax distortion between June and September. The PH government removed the Goods and Services Tax (GST) with effect from June 2018 and it was replaced with the Sales and Service Tax (SST) which came into force from September 2018. As a result, inflation was below 1% in June from an average of 1.7% between Jan and May 2018. When the SST came into force September 2018, its impact on inflation was more muted.

• Today, with the distortion of consumption tax at the back of our mind, our focus is on the economic fundamentals i.e. demand and supply. Upwards price pressures coming from food due to supply disruption as a result of flash floods remains The introduction of the departure levy which came into force from 1 September for those leaving the country (between RM8 and RM150) has added some upwards pressure on air passenger transport prices, up 8.1% y/y in September from 7.8% y/y in August (0.3% m/m). But the low fuel and transport prices will continue to put a lid on the overall upside pressure on headline CPI.

• For 2019, the overall inflation is projected to be around 0.8%. Low inflation is partly due to weak domestic spending. This is reflected by the wage growth that has been easing in 2019. In August, wages in the manufacturing sector grew by 3.3% y/y, compared to 10% y/y at end-2018. Looking ahead in 2020, we project inflation to be around 2%, partly driven by the low-base effect.

• Looking at the current inflation data, it clearly suggests there is ample scope for BNM to reduce rates by 25bps from the current 3.00% OPR during the 5 November Monetary Policy Committee (MPC) meeting. Nevertheless, the economy has outperformed its Asian neighbours in 1H2019. Besides, the economic outlook for 2020 is said to be stronger, projected to grow by 4.8% from 4.7% in 2019 as announced in the recent Budget 2020. It shows the economy will be able to steer sustainable growth as we move forward despite ongoing global headwinds. On that note, we have taken a view of a 60% chance of no rate cut and a 40% chance of a rate cut in the 5 November 5 MPC meeting.

Source: AmInvest Research - 24 Oct 2019