In November, the CPI Index continued to grow by a slower pace at 3.4% y/y from 3.7% in October. Meanwhile, core inflation slipped marginally to a one-year low at 2.2% y/y. The subdued inflation was mostly attributed to a slower growth in food and non-alcoholic beverages, which accounts 30.2% of the total weight recorded at 4.0% y/y in November compared to 4.4% in the month prior. At the same time, the transport component, encompassing energy prices, rose by 10.8% y/y versus 12.1% in October. We noticed that the inflation data failed to dampen the ringgit’s mood, as the currency closed higher against the greenback by 0.17% at 4.0740. We project the MYR to average around 4.30 against the USD for the full year of 2017 while reaching 4.05–4.08 at end-period 2017. Our inflation projection for 2017 is expected to stay around 4% and ease to 2.5% – 3.0% for 2018. Following the negative returns which been in place since January 2017, contributed by the inflationary pressure, we expect BNM to most likely institute its first rate hike by 25bps in January 2018. We believe there will be room for another rate hike, most likely in 3Q2018 by another 25bps, which should normalise the OPR rate to 3.5%.

• In November, the CPI Index continued to grow by a slower pace at 3.4% y/y from 3.7% in October. Meanwhile, core inflation slipped marginally to a one-year low at 2.2% y/y.

• The subdued inflation was mostly attributed to a slower growth in food and non-alcoholic beverages, which accounts 30.2% of the total weight recorded at 4.0% y/y in November compared to 4.4% in the month prior. At the same time, the transport component, encompassing energy prices, rose by 10.8% y/y versus 12.1% in October. The persistent double-digit growth is largely due to recovery of crude oil prices which resulted in the rise in average fuel prices from RM1.95–RM2.30 in 2016 to RM2.30–RM2.59 at present time.

• Despite a slower inflation print, we noticed on a month-on-month basis, the CPI ticked up by 0.7% compared to a 0.2% fall from the month prior. We believe a slight demand-pull inflation kicked in as cost picked up in food & nonalcoholic beverages (0.1 %), alcoholic beverages & tobacco (0.1 %), health (0.1 %), recreation services & culture (0.1 %) and restaurants and hotels (0.2 %). .

• We noticed that the inflation data failed to dampen ringgit’s mood, as the currency closed higher against the greenback by 0.17% to 4.0740. We believe the ringgit is poised to stay strong supported by: (1) robust GDP growth, (2) healthy trade numbers; (3) positive onshore sentiments; (4) a climbing international reserves at US$101.9bil, and (4) a hawkish tone by BNM on the monetary policy. We project the MYR to average around 4.30 against USD for the full year of 2017 while reaching 4.05–4.08 at end-period 2017.

• Our inflation projection for 2017 is expected to stay around 4% and ease to 2.5% – 3.0% for 2018. Following the negative returns which has been in place since January 2017, contributed by the inflationary pressure, we expect BNM to most likely institute its first rate hike by 25bps in January 2018. We believe there will be room for another rate hike, most likely in 3Q2018 by another 25bps, which should normalise the OPR rate to 3.5%, as we believe the GDP will continue to grow albeit at a moderate pace supported by domestic demand and exports. Our in-house projection is for 2018 GDP to reach 5.5% before bottoming in 1Q2019.

Source: AmInvest Research - 21 Dec 2017