The Producer Price Index (PPI) continued to grow at single digit for the eighth straight month and at a slower pace for the fourth straight month with a gain of 4.7% y/y in October due to slower increases reported by intermediate materials, finished materials, electricity and gas as well as the drop in the cost of water supply. We expect the cost of doing business to remain fairly favourable, supported by a stronger USD/MYR and stable commodity prices that should help contain imported inflationary pressures.

On the whole, we project the headline CPI for 2017 to hover around 4% with the PPI at 6.8%– 7.0%. While the OPR for 2017 is expected to stay at 3.00% in 2017, we maintain our 25bps rate hike in 1H2018 and a probable 25bps rate hike in 2H2018 pending the pace of the economic growth, the magnitude of demand-pull inflation as well as the strength of the USD/MYR.

• The Producer Price Index (PPI) continued to grow at single digit for the eighth straight month. It has also been growing at a slower pace for the fourth straight month. In October, the PPI rose 4.7% y/y from 6.7% y/y in September, bringing the first 10 months’ average to 7.6% y/y.

• The slower gain in the PPI was due to a moderate increase in the prices of intermediate material which rose 4.9% y/y in October from 6.6% y/y in September as well as finished materials which grew by only 0.2% y/y in October from 1.0% y/y in September which could partly be due to the firmer Malaysian ringgit (MYR) against the USD.

• Meanwhile, the price of electricity and gas supply rose at a slower pace by 0.2% y/y while the cost of water supply fell 0.3% y/y in October.

• On the whole, we feel that the overall cost of doing business is fairly contained. With the MYR presenting a firmer outlook against the USD, added with stable commodity prices, we expect the PPI to continue rising at a moderate pace. We expect the impact of higher base to slow the gains of PPI reading in the coming months.

• We expect our headline CPI to average around 4.0% while the PPI to hover around 6.8%–7.0% for 2017. While the OPR for 2017 is expected to stay at 3.00% in 2017, we maintain our 25bps rate hike in 1H2018 and a probable 25bps rate hike in 2H2018 pending the pace of the economic growth, the magnitude of demand-pull inflation as well as the strength of the USD/MYR.

Source: AmInvest Research - 4 Dec 2017