-  Malaysia’s Consumer Price Index (CPI) grew by 2.6% YoY in September (August: +1.9%), which was broadly in line with both our and consensus expectations of 2.5%. Specifically, core inflation advanced by 1.9% YoY while the cost component of Food and Non-alcoholic Beverages had increased by 3.9% during the month.

-  Particularly, the transport index rose by 4.6% in September (August: +0.6%) as petrol pump prices were revised upwards by 20 sen in early September owing to the rationalisation of subsidies. The government is subsidising 63 sen for every litre of RON95 currently.

-  On a YTD basis, inflation has increased by a modest 1.8% led by the growth in Food and Non-alcoholic Beverages. However, inflation will likely pick up in the coming months due to higher transport prices.

-  Based on the recent guidance by the EPU, the government remains committed to rationalise subsidies. However, the government is unlikely to unveil a guided timeframe for future subsidy cuts.

-  All in all, the subsidies rationalisation will take place gradually across a period of time. In particular, petrol subsidies are expected to be removed completely by the end of 2015.

-  The government had announced during the budget that sugar subsidy of 34 sen will be abolished effective October 26. Nonetheless, we do not expect a significant impact of the sugar price increase on inflation as the component cost of Sugar, Jam, Honey, Chocolate & Confectionery account for only 0.6% of CPI.

-  For petrol, we anticipate three separate cuts in subsidies by 20 sen each round from now until the end of 2015. We assume that each round of petrol pump price increase will be within an interval of 9 months as the government plans to float the petrol pump prices based on market rate by 2016. With that, the next petrol price rise of 20 sen is expected to happen sometime in June 2014.

-  Considering that the budget allocation for total subsidies is reduced in 2014, we do envisage further price rationalisation ahead. Upside pressure to prices will come mainly from the sooner-than-expected cuts in subsidies.

-  Our estimates suggest that a one-time increase in petrol pump prices by 20 sen in 2014 could potentially increase the full year CPI to 3.0%. Meanwhile, our CPI projection for this year is 2.2%.

-  In view of the uncertainties abroad, the OPR is likely to be retained at 3.0% at the final Monetary Policy Committee meeting on November 7. Looking ahead, we envisage BNM raising the interest rate by 25 bps in 2H14 on the back of higher cost pressure. 

Source: AmeSecurities