Headline inflation in October rose 3.7% as both the food and non-food prices grew at a slower pace by 4.4% y/y and 3.4% y/y respectively while fuel price climbed 20.5% y/y. Meanwhile, core inflation remained stable at 2.3% y/y in October and is expected to inch up in the coming months fuelled by a stronger GDP of 5.9% average for three quarters and hike in private sector wages which were up 7.3% y/y in 3Q2017 for the second consecutive quarter after hovering around 4% in the previous 5 quarters.

We project inflation to stay around 4.0% for 2017 and 2.5% – 3.0% for 2018. With the economy being in negative returns since January 2017, added with strong GDP growth and healthy private wages, we expect BNM to institute its first rate hike by 25bps in January 2018 and another 25bps hike most likely in 3Q2018, which should normalise the OPR rate to 3.5%.

• Headline inflation in October rose 3.7% from 4.3% y/y in September, bringing the first 10 months’ average to 4.0%. Both the food and non-food inflation grew at a slower pace by 4.4% y/y and 3.4% y/y respectively versus 4.6% y/y and 4.2% y/y respectively in September. At the same time, we found the fuel price climbing 20.5% y/y in October compared to 27.5% y/y in September.

• But core inflation remained stable at 2.3%y/y in October compared with 2.4% in September. We expect core inflation to inch up in the coming months after hovering between 2.2% and 2.5% y/y since January 2017, fuelled by the strong GDP growth, averaging at 5.9% y/y for the first three quarters. Also private sector wages climbed 7.3% y/y in 3Q2017 and 2Q2017 after hovering around 4% in the previous 5 quarters.

• We project inflation to stay around 4% for 2017 and ease to 2.5% – 3.0% for 2018. Underpinned by the inflationary pressure, the economy has been in the negative returns since January 2017. Added with strong GDP growth, we expect BNM to most likely institute its first rate hike by 25bps in January 2018. Room for another rate hike is in the cards, most likely in 3Q2018 by another 25bps, which should normalise the OPR rate to 3.5%.

Source: AmInvest Research - 27 Nov 2017