- Malaysia’s Consumer Price Index (CPI) advanced by 3.2% YoY in December, which is above both our and consensus expectations of 3.1%.

-  Specifically, core inflation grew by 2.6% YoY while the cost component of Food and Non-alcoholic Beverages had increased by 4.5% during the month.

-  Inflation rose by 0.4 ppt YoY to 2.1% in 2013. For the full year, the index for Food & Non-Alcoholic Beverages and Non- Food soared by 3.6% and 1.4% respectively.

-  Inflation will remain high in the forthcoming months spurred by the new electricity tariff which takes effect in January 2014.

-  In tandem with higher transport cost and soaring food prices, our estimate suggests an overall inflation of 3.1% in January 2014.

-  Going forward, inflation will stay elevated and could even reach 3.5% during some months in 2014 as we expect further price rationalisation.

-  However, modest economic growth and stable external price environment would buffer the adverse impact of subsidy cuts.

-  No change in our assumptions at this juncture. We expect a full year CPI of 3.0% for 2014.

-  Ahead of the Monetary Policy Committee meeting on January 29, we expect Malaysia’s benchmark rate to remain unchanged at 3.0% although prices have picked up.

-  In part, domestic demand has moderated in recent months. Both discretionary spending and purchasing power have reduced driven by higher cost pressure coupled with the weaker Ringgit.

-  Also, BNM will likely delay the rate increase toward 2H14 to consider the effects of fiscal consolidation on domestic demand.

-  Elsewhere, the Fed envisages solid economic growth this year and is expected to trim its bond-buying program for the second time in six weeks during its policy decision on January 28-29.

Source: AmeSecurities