Malaysia

Low possibility of another rate hike

May’s headline inflation of 1.8% y/y is the fastest gain in four months due to a strong recovery in transport prices as well as prices of food and non-alcoholic beverages. Moving forward, we expect inflation to stay modest despite some upwards pressure from demand as the cost side of the equation is poised to stay stable.

We expect the current 3.25% overnight policy rate (OPR) to remain throughout 2018. We feel there is no real urgency for Bank Negara to raise rates given that: (1) the economy is sitting in comfortable positive real returns; (2) the ringgit is still stronger against the USD when compared to regional currencies versus the USD; and (3) no real demand pull inflationary pressure despite an uptick in consumer spending with fuel subsidies, the removal of the GST that will be replaced with the SST, and better confidence. We maintain our 2018 inflation at 2.0%–2.5%.

• Headline inflation in May of 1.8% y/y fell in line with expectations and was marginally above our estimation of 1.7% y/y. May’s headline inflation was higher than April’s reading of 1.4%. It brings the first five-month average to 1.7%, which is still below our full-year projection of 2.0%–2.5%.

• May’s inflation was driven by transport prices, up 3.8% from 0.4% y/y in April due to costlier fuel prices. The pump prices for RON95, RON97 and diesel climbed 4.5%, 3.5% and 7.0% y/y respectively although on a monthly basis, the prices only increased by 1 sen for RON95 and RON 97 to RM2.20/litre and RM2.47/litre respectively and diesel to RM2.18/litre.

• Also, the prices of food and non-alcoholic beverages, which make up 29.5% in the CPI weights, rose 2.2%. Meanwhile, the core inflation grew at the same pace as inflation in April by 1.5% y/y.

• Moving forward, we expect inflation to stay modest despite some upwards pressure coming from demand on the back of the Hari Raye festive season. The upside will be limited with a stable pump price added with no GST that will be replaced with the SST from September. This should help improve the disposable income.

• On the cost, side, we see limited upwards pressure following a more stable ringgit outlook against the USD. We expect the ringgit to hover around 3.98 – 4.04 in June. Besides, with fuel subsidy in place, it should help contain upwards pressure. We expect some impact from the base issue.

• We expect the current 3.25% OPR to remain throughout 2018. We feel there is no real urgency for Bank Negara to raise rates given that: (1) the economy is sitting in a comfortable positive real returns; (2) the ringgit is still stronger against the USD when compared to regional currencies versus the USD; and (3) no real demand pull inflationary pressure despite an uptick in consumer spending with fuel subsidies, removal of the GST that will be replaced with the SST, and better confidence. We maintain our 2018 inflation at 2.0%–2.5%.

Thailand

Room for first rate hike in 4Q2018

In line with market and our expectations, the Bank of Thailand (BoT) left the kept policy interest rate unchanged at 1.5% following a vote of 5 to 1 with one calling for a 25bps rate hike to 1.75%. Although the BoT reiterates the need to maintain the current accommodative monetary policy, it has revised upwards the 2018 and 2019 GDP to 4.4% and 4.2% respectively (from 4.1% for both years) as well as 2018 inflation data to 1.1% from 1.0%.

With the 2018 GDP growth now at 4.4%, which is higher than our revised projection of 4.3%, and inflation in line with our view, it indicates that the policymakers may start normalising the policy rate in 2018. With private investment picking up, added with a modest rise in inflation for the second straight month, it has allowed us to form a view that the BoT will likely start raising rates in 4Q2018 by 25bps.

• In line with market and our expectations, the Bank of Thailand (BoT) left the kept policy interest rate unchanged at 1.5%, where it has been since 2015. The decision was supported in a vote of 5 to 1 with one calling for a 25bps rate hike to 1.75%.

• The BoT pointed out the need to maintain its current accommodative monetary policy. This is despite having raised upwards the GDP growth for 2018 and 2019 to 4.4% and 4.2% respectively (from 4.1% for both years) as well as inflation for 2018 to 1.1% from 1.0% previously. Besides, the BoT foresees a slightly pickup in the core inflation while being mindful of the structural changes that may contribute to subdued numbers.

• With the 2018 GDP growth now at 4.4%, which is higher than our revised projection of 4.3%, and inflation in line with our view, it indicates that the policymakers may start normalising the policy rate in 2018. With private investment picking up, added with a modest rise in inflation for the second straight month, it has allowed us to form a view that the BoT will likely start raising rates in 4Q2018 by 25bps.

Philippines

Still room to increase rate

In line with market and our expectation, the central bank raised 25bps on its overnight borrowing rate to 3.50% from 3.25% and its overnight lending rate to 4.00% from 3.75%. It marked the second increase in 2018 after having raised rates in May. Following the two back-to-back rate increases by the central bank, there is some room for the rate hike tightening cycle to end. Much will depend on the outlook of inflation.

We believe the central bank will keep its door open for another rate hike. Apart from the US Fed tightening cycle, the impact from the ECB’s potential ending of its QE and rate hike envisaged in 2019 will tighten global liquidity gradually. Besides, the second round effect on inflation should come from wages and transport fares rise. This probably explains the limited room for the central bank to lower its inflation projection for 2018 and 2019 to average at 4.5% and 3.3% respectively from its previous forecast of 4.6% and 3.4%, respectively. Otherwise, we will maintain a less hawkish stance.

• In line with market and our expectation, the central bank raised 25bps on its overnight borrowing rate to 3.50% from 3.25% and its overnight lending rate to 4.00% from 3.75%. It marked the second increase in 2018 after having raised rates in May.

• The decision to raise rates was due to the inflation rate, which is running above its target. Inflation in May rose 4.6% y/y from a 4.5% in April. The first five-month average inflation stood at 4.1% y/y which is higher than the central bank’s target range of between 2% and 4%.

• Following the two back-to-back rate increases by the central bank, there is some room for the rate hike tightening cycle to end. Much will depend on the outlook of inflation. We feel inflation should peak in 3Q2018 onwards, with pressure from higher oil prices starting to fade and the Congress expected to pass a bill to lift quotas on rice imports.

• We believe the central bank will keep its door open for another rate hike. Apart from the US Fed tightening cycle, the impact from the ECB’s potential ending of its QE and rate hike envisaged in 2019 will tighten global liquidity gradually. Besides, the second round effect on inflation should come from wages and transport fares rise. This probably explains the limited room for the central bank to lower its inflation projection for 2018 and 2019 to average at 4.5% and 3.3% respectively from its previous forecast of 4.6% and 3.4%, respectively. Otherwise, we will maintain a less hawkish stance.

Source: AmInvest Research - 21 Jun 2018