Headline inflation in June grew at a slower pace by 0.8% y/y compared to 1.8% y/y in May, bringing the 1H2018 average to 1.6%. Meanwhile, core inflation rose 0.1% y/y in June versus 1.5% y/y in May, translating to 1.5% in 1H2018. The slower inflation was largely due to softer prices of food and non-alcoholic beverages and broad utilities which increased by 0.8% y/y and 1.5% y/y compared to 2.2% y/y and 2.1% y/y respectively.

Based on the current inflationary trajectory and BNM’s outlook during the recent MPC meeting which cited that the headline inflation may fall into negative territory, we feel BNM will likely maintain the OPR at 3.25% for the rest of 2018. Nevertheless, we are pricing in a low possibility of a rate cut, which has increased from near zero to 20%. We feel that such move will go against the current tide of rate hike not only in the US but also several countries in this region. Such an opposing trend will intensify the weakening pressure on the ringgit and equity markets. Besides, we feel the 2018 GDP for Malaysia should fall within our forecast of 5.5% with the lower end at 5.3%. While the probability is still low for a rate cut, we revise downwards our inflation projection to 1.5% from 2.1%.

• Headline inflation in June grew at a slower pace by 0.8% y/y compared to 1.8% y/y in May, bringing the 1H2018 average to 1.6%. Meanwhile, core inflation rose 0.1% y/y in June versus 1.5% y/y in May, translating to 1.5% in 1H2018.

• The slower inflation was largely due to softer prices of food and non-alcoholic beverages and broad utilities which increased by 0.8% y/y and 1.5% y/y compared to 2.2% y/y and 2.1% y/y respectively.

• However, transport prices accelerated in June, up 5.5% y/y in June from 3.8% y/y in May due to costlier fuel prices. The pump prices for RON95, RON97 and diesel climbed 9.5%, 13.7% and 13.0% y/y respectively despite unchanged prices on a monthly basis. Higher pump prices was due to the gain in WTI and Brent prices up 48.9% y/y and 59.7% y/y respectively. Also the tax holiday was seen as the main reason for the weak inflation.

• As Malaysian consumers enjoy the tax holiday up to end-August, added with subsidized fuel prices, we foresee a lackluster price pressure. This should help boost disposable income and fuel private consumption in the economy. We believe the impact of replacing the GST with the SST will be less painful, and expect the impact to be transitory without significantly deviating from the current weakening trend in inflation.

• Based on the current inflationary trajectory and BNM’s outlook during the recent MPC meeting which cited that the headline inflation may fall into negative territory, we feel BNM will likely maintain the OPR at 3.25% for the rest of 2018 but pricing in a low possibility for a rate cut which has increased from near zero to 20%.

• Our argument is that we are currently sitting on a positive real returns with a gap around 1.65% which justifies a rate cut of as much as 50bps in a move to support the economic growth.

• However, we feel such move will go against the current tide of rate hike not only in the US but also several countries in this region. Such an opposing trend will intensify the weakening pressure on the ringgit and equity markets. Besides, we feel the 2018 GDP for Malaysia should fall within our forecast of 5.5% with the lower end at 5.3%. While the probability is still low for a rate cut, we revise downwards our inflation projection to 1.5% from 2.1%.

Source: AmInvest Research - 19 Jul 2018