Malaysia

Envisage gradual pickup in inflation

March headline inflation came in lower than both our and consensus expectation at 1.3% y/y, while core inflation was at 1.7% y/y. A high base, strong MYR against the USD, softer food prices as well as retail pump prices are the key culprits.

Going forward, we expect inflation to rise gradually driven by firmer commodities prices and tighter labour market conditions which should result in firmer wages and better disposable spending by households. With our inflation projection between 2% and 2.5%, we expect BNM to normalise its policy rate to 3.50%, most likely in September in which we maintain our 30% chance.

• March headline inflation came in lower than both our and consensus expectation. The 1.3% y/y gain in headline fell below our expectation of 1.0% and consensus of 1.6%. The March inflation reading was slightly lower than February’s 1.4% y/y. Hence for the 1Q2018, headline inflation averaged at 1.8% y/y compared with 4.1% y/y over the same period in 2017.

• March core inflation, (excludes volatile prices like fresh food items, and administered prices of goods and services) rose by 1.7% y/y, marginally lower than February’s reading of 1.8%y/y. This brings the average for 1Q2018 to 1.9%y/y.

• Slower inflation was due to: (1) softer gain from food prices which rose by 2.9% y/y in March from 3.0%y/y in February, the lowest since October 2016; (2) a high base; (3) stronger MYR against the USD, where the currency appreciated 12.1% y/y; and (4) lower retail petrol prices with RON95 down 4.7% y/y in March from -1.7% y/y in February, while RON97 fell 5.6% y/y in March from -2.7% y/y in February, and diesel down 1.8% y/y in March from 3.1% y/y in February.

• Going forward, we expect inflation to rise gradually, underpinned by stronger global growth which we project at 3.6% and that should add some upwards pressure on commodities prices plus tighter labour market conditions which should result in firmer wages and better disposable spending by households.

• But better investment in capacity expansion and labour productivity should contain the upside inflationary pressure. We project inflation would be around 2.0% – 2.5%, which falls within the BNM range of 2% – 3%. We continue to believe that strong growth conditions will allow BNM to normalise monetary policy further. Hence, we maintain our 30% chance of BNM raising the OPR by 25bps in September, taking the year-end policy rate to 3.50%.

UK

Raising our probability for May rate hike

Inflation in March grew 2.5% y/y, while core inflation rose 2.3%y/y. We feel the March inflation data seems to suggest the squeeze on UK households could be coming to an end as wages remain firm. Average earnings climbed by 2.8% y/y in February. It was the first time since March 2017 where consumers were able to enjoy positive real wage growth.

We still believe the central bank will raise rates in May largely due to demand-pull inflationary pressure coming from: (1) a tighter labour market, (2) firmer wages, and (3) improving domestic demand. We now raise our probability for a rate hike in May to about 75% from 60% previously.

• March inflation grew 2.5% y/y from 2.7% y/y in February, missing market expectations of 2.7%. It is the lowest rate in a year. At the same time, underlying inflation eased to 2.3% y/y in March from 2.4% y/y in February, while the Consumer Prices Index, including owner occupiers’ housing costs (CPIH), slowed down on a sequential basis to 2.3% in March from 2.5% y/y in February.

• We feel the March inflation data seems to suggest the squeeze on UK households could be coming to an end as wages remain firm. Average earnings including bonus rose by 2.8% y/y in February the same pace as in January. Hence, the month of February was the first time since March 2017 where consumers were able to enjoy positive real wage growth.

• We still believe the central bank will raise rates in May largely due to demand-pull inflationary pressure coming from: (1) a tighter labour market, (2) firmer wages, and (3) improving domestic demand. We now raise our probability for a rate hike in May to about 75% from 60% previously.

Euro

Foresee ECB normalising its monetary policy

Headline inflation rose 1.3% y/y in March while core inflation stayed at 1.0% y/y for the third consecutive month. Improving labour market conditions have yet to translate into a faster wage growth due to the slack in the labour market and weak productivity. Also, the strong euro is weighing on inflation.

We expect inflation to be around 1.7% in 2018, below the ECB’s target of 2.0%. We expect the ECB to stay on track and normalise the monetary policy. We foresee it to gradually produce details on winding down the bond-buying programme by end-2018. In our view, the ECB will taper the €30bil bondbuying programme by September to €15bil in October, and end the programme by end-December 2018. We foresee the normalisation to start in 2Q2019.

• Headline inflation rose 1.3% y/y in March from 1.1% y/y in February. Meanwhile, core inflation which strips out volatile components such as food and fuel stayed at 1.0% y/y for the third consecutive month.

• We found the improving labour market condition have yet to translate into a faster pace of wage growth. This is due to the significant slack in the labour market apart from weak productivity growth. Besides, the stronger euro could also be weighing on inflation. Hence, we expect inflation to be around 1.7% in 2018, which will be below the 2% target set by the ECB.

• We expect the ECB to stay on track and normalise the monetary policy. We foresee them to gradually produce details on winding down the bond-buying programme by end-2018. In our view, the ECB will taper the €30bil bond-buying programme by September to €15bil in October, and end the programme by end-December 2018. We foresee the normalisation to start in 2Q2019.

Source: AmInvest Research - 19 Apr 2018