- Malaysia’s Consumer Price Index (CPI) inched up to register a growth of 3.3% YoY in June (May: +3.2% YoY).

-  During the month, core inflation grew by 3.2% YoY (May: +3.1% YoY) while the cost component of Food and Non-alcoholic Beverages had increased by 3.5% YoY (May: +3.3% YoY).

-  Meanwhile, transport cost remained elevated at 5.5% YoY in June (May: +5.5% YoY).

-  On a YTD basis, inflation soared by 3.4% as at end-June driven by price increases in Food and Non-alcoholic Beverages (+3.7% YoY) and Transport (+5.3% YoY).

-  We note that headline inflation has tapered from February’s high of 3.5%. However, real interest rate remained in negative territory for seven consecutive months.

-  In order to ensure that prices stay in check, we believe that the government could potentially retain petrol subsidies at the current levels for the rest of 2014.

-  Note that subsidies for RON95 and diesel were 71 sen and 74 sen per litre, respectively, in June 2014.

-  In terms of percentage contribution, the transport index accounts for 14.9% of total CPI. As such, any adjustments in petrol pump prices will significantly impact overall inflation.

-  Without further subsidy rationalisation for this year, headline inflation will likely post an increase of 3.2% YoY in July before tapering further in the months ahead.

-  If the subsidy remains intact, overall inflation will stabilise in September as the impact of last year’s petrol pump price increase gradually dissipates.

-  As for interest rate, we note that the broad-based interest rate increase recently is to mitigate the risk of financial and economic imbalances.

-  Going foward, BNM will monitor for risks of destabilising financial imbalances while ensuring sustainable economic growth in a stable price environment.

-  We believe that the recent rate increase coupled with other macro prudential measures will continue to have a moderating impact on household indebtedness and loans growth.

-  As such, we expect the OPR to be retained at 3.25% during the next Monetary Policy Committee meeting on 18 September.

-  No changes to our full-year estimates for 2014. We are keeping our CPI projection at 3.3% for 2014 and year-end target for the OPR at 3.25%.

Source: AmeSecurities