We expect headline inflation to continue easing with our preliminary estimates suggesting it should be around 0.6% in July 2018 from June’s 0.8% y/y. The lack of inflationary pressure could be attributed to the effects from the tax holiday, fuel subsidy, the ringgit’s gain of 5.6% y/y in July against the USD while on a m/m basis, it fell by 1.0% due to the base effect and a lack of demand pull pressure.

Should inflation continue to exhibit a softening trend, we believe the full-year average will reach our lower end of 0.6%–0.8% projection instead of our base case forecast of 1.5% for 2018. The possibility to move our base case to the lower end of our inflation projection is high on our cards. For 2019, we project inflation to hover around 1.5%–1.8%.

On a slower GDP outlook for 2018 around 4.8%–5.0% and 4.2%–4.5%, there is room for a 25bps rate cut on the 3.25% OPR with a probability of 25%. The low probability for now is because rising global interest rates are putting a lid for a rate cut as it will result to interest rate differential that will not favour us and hence add pressure on the ringgit to weaken. We expect the OPR to stay at 3.25% in 2018.

• We expect headline inflation to continue easing. Our preliminary estimates suggest headline inflation for the month of July could soften further to 0.6% from the month of June’s reading which was at 0.8% y/y. Our preliminary estimates appear to be lower than the consensus estimates of 0.9%.

• The lack of inflationary pressure could be attributed to: (1) effects from the tax holiday period following the abolishment of the GST; (2) stable fuel pump prices with both RON95 and diesel holding at RM2.20/litre and RM2.18/litre respectively due to the fuel subsidy while RON97 fell 4 sen to RM2.55/litre; (3) the ringgit gaining 5.6% y/y in July while on a m/m basis, it fell by 1.0% compared to June’s 1.7% depreciation; (4) base effect; and (5) lack of demand pull pressure.

• Should inflation continue to exhibit a softening trend, we believe the full-year average will reach our lower end of 0.6%– 0.8% projection instead of our base case forecast of 1.5% for 2018. There is much room for us to move our base case to the lower end of our inflation projection. For 2019, we project inflation to hover around 1.5%–1.8%.

• On a slower GDP outlook for 2018 around 4.8%–5.0% and 4.2%–4.5%, a 25bps rate cut on the 3.25% OPR is on our radar with a probability of 25%. The low probability for now is because rising global interest rates are putting a lid for a rate cut as it will result to interest rate differential that will not favour us and hence add pressure on the ringgit to weaken. We expect the OPR to stay at 3.25% in 2018.

Source: AmInvest Research - 23 Aug 2018