Headline inflation came in line with market consensus but slightly higher compared to our expectation of 0.6%. It grew by 0.9% y/y in July from 0.8% y/y in June. This brings the inflation to average at 1.5% for the first seven months in 2018. Meanwhile, the underlying inflation contracted by 0.2% y/y versus 0.1% y/y in June, suggesting the price pressure in the economy remains largely subdued on the back of the tax holiday.

We foresee a moderate pressure on inflation after the implementation of the sales & services tax (SST) though the transition will not deviate significantly from the ongoing weak inflation trajectory. Based on the current inflation trajectory and a slower GDP outlook for 2018 of around 4.8%–5.0%, these suggest the policymakers have room for a 25bps rate cut. However, the probability remains low based on our assessment given that the rising global interest rates are putting a lid for a rate cut as it will result in interest rate differential that will not favour us, hence adding pressure on the ringgit to weaken. On that note, we expect the OPR to remain unchanged at 3.25%.

• Headline inflation came in line with market consensus but slightly higher compared to our expectation of 0.6%. It grew by 0.9% y/y in July from 0.8% y/y in June. This brings the inflation to average at 1.5% for the first seven months in 2018. Meanwhile, the underlying inflation contracted by 0.2% y/y versus 0.1% y/y in June, suggesting the price pressure in the economy remains largely subdued on the back of the tax holiday.

• The slight uptick in inflation stemmed from both costs of transport and broad utilities, accelerating to 6.7% y/y and 2.0% y/y in July compared to 5.5% y/y and 1.5% y/y, respectively in June. The cost of food on the other hand continues to ease for the seventh consecutive month to 0.7% y/y from 0.8% y/y in June.

• We foresee a moderate pressure on inflation after the implementation of the sales & services tax (SST) though the transition will not deviate significantly from the ongoing weak inflation trajectory. We also believe the transition will not exert a heavy burden on consumers due to its nature of a single-stage tax and only applies to narrower sets of goods and services. Thus, we believe the lacklustre price pressure will boost household disposable income and keep private consumption on a sustainable pace.

• Based on the current inflation trajectory and a slower GDP outlook for 2018 at around 4.8%–5.0%, these suggest the policymakers have room for a 25bps rate cut. Also, with the economy comfortably sitting on a positive real returns, it opens the door for a rate cut amid waning global demand. However, the probability remains low based on our assessment given that the rising global interest rates are putting a lid for a rate cut as it will result in interest rate differential that will not favour us, hence adding pressure on the ringgit to weaken. On that note, we expect the OPR to remain unchanged at 3.25%.

Source: AmInvest Research - 27 Aug 2018