Headline inflation remained below the 4% growth for the third consecutive month. In July, inflation rose 3.2% y/y while the core inflation rose marginally to 2.6% y/y. We believe part of the slower gain in the headline inflation was due to lower fuel prices, reflected by the average price of RON95 petrol at RM1.958 per litre in July 2017 and a stable MYR/USD averaging at 4.288 in July.

With the 1H2017 average CPI at 4.1% y/y, we now expect the 2H2017 to be much lower around 3.0% – 3.3%. On that note we have revised downwards our 2017 full-year average inflation from 4.0% to 3.5% – 3.7%. Still, we feel the real returns will remain negative although there are possibilities for the inflation to dip below the 3.00% OPR in some of the months as we move forward. Thus, our base case of no change in the OPR at 3.00% in 2017 remains and we maintain a 45% chance for a 25bps rate hike sometime in 4Q2017 should the potential incoming data justify such a need.

• Headline inflation remained below the 4% growth for the third consecutive month. In July, inflation rose 3.2% y/y compared to 3.6% y/y in June. While food prices eased marginally to register 4.2% y/y in July from 4.3% y/y in June, we found much slower gain in non-food items, which improved by 2.7% y/y in July from 3.2% y/y in June. Meanwhile, core inflation rose marginally to 2.6% y/y in July from 2.5% y/y in June.

• We believe part of the slower gain in the headline inflation was due to lower fuel prices, reflected by the average price of RON95 petrol at RM1.958 per litre in July 2017 versus RM2.000 per litre in June. This is evidenced by the slower gain in the prices of fuel and lubricants which rose 11.8% y/y in July compared to 17.2% y/y in June. Also, the MYR/USD was relatively stable averaging at 4.288 in July.

• With the 1H2017 average CPI at 4.1% y/y, we now expect the 2H2017 to be much lower around 3.0% – 3.3%. On that note we have revised downwards our 2017 full-year average inflation from 4.0% to 3.5% – 3.7%. Still, we feel the real returns will remain negative although there are possibilities for the inflation to dip below the 3.00% OPR in some of the months as we move forward. Thus, our base case of no change in the OPR at 3.00% in 2017 remains and we maintain a 45% chance for a 25bps rate hike sometime 4Q2017 should the potential incoming data justify such a need.

Source: AmInvest Research - 24 Aug 2017