April headline inflation of 1.4% y/y came in slightly lower than our as well as market expectations of 1.5% and 1.6% respectively. Meanwhile, the underlying inflation eased for the third straight month to 1.5% y/y from 1.7% y/y in March. The average headline inflation for the first four months is 1.7% y/y, which is below our projection of 2.5%–2.8% and BNM’s 2%–3% for 2018.

We believe potential inflationary pressure from the cost side will remain subdued due to the absence of the GST (which will be replaced with the SST), fuel subsidy and firm ringgit. This should allow BNM to maintain the OPR at current levels throughout 2018 which is our base case. However, liquidity remains healthy, suggesting that the demand pull inflation remains. Thus we reiterate our 45% chance of a rate hike in September.

• April headline inflation of 1.4% y/y (1.3% y/y in March) came in slightly lower than our as well as market expectations of 1.5% and 1.6% respectively. Meanwhile, the underlying inflation eased for the third straight month to 1.5% y/y from 1.7% y/y in March.

• Average headline inflation for the first four months is 1.7% y/y. It is below our projection of 2.5%–2.8% as well as Bank Negara Malaysia’s (BNM) current estimate range of 2–3% for 2018.

• With the goods and services tax (GST) to be zero-rated in June and the possibility of a 10% sales and service tax (SST) to be reintroduced in 1-2 months, we expect a downwards bias on inflation. Furthermore, the current retail pump prices with RON95 and RON 97at RM2.19/litre and RM2.46/litre respectively and diesel at RM2.17/litre are expected to remain. Besides, the ringgit which appreciated against the USD by 11.8%y/y in April, will remain firm with the downside on ringgit around 2% –4% and this will keep inflationary pressure at bay.

• Looking at the current inflationary trend, it clearly supports our base case of one rate hike of 25bps in the overnight policy rate (OPR) by BNM which took place in January. However, growth in liquidity of around 10% suggests that potential demand pull inflation remains. Thus, we maintain our 45% chance of another rate hike in September.

Source: AmInvest Research - 24 May 2018