News

Malaysia’s CPI growth again edged higher to 2.9% yoy in November (Oct: +2.8% yoy), hitting a 23-month high and was broadly in line with market expectations.

During the month, a combination of elevated food prices, higher rental cost and rising services inflation contributed to the uptick in CPI growth. Price increase of other categories was generally stable during the month (Figure #1).

MoM basis, the CPI rose by 0.3% (Oct: +0.4% mom), the eleventh consecutive month of increase.

Comments

The spillover effect of the collective subsidy removals (i.e. fuel price & sugar price hike) became apparent in Nov. Not only inflation of major categories was either maintained or slightly higher, higher price inflation was also observed in other categories particularly the services sectors (i.e. education & health) as well as rental cost of dwelling units.

A very important of pass-through indicator, the services inflation, picked up to 2.5% yoy (Oct: +2.1% yoy), the highest reading in 20 months. Further rise in services inflation would mean higher pass-through effect and may attract soonest-than-expected rate hike by BNM.

The housing & utilities segment experienced a price spike of 2.3% yoy (Oct: +1.8% yoy) driven mainly by higher actual rental for housing (+2.9% yoy; Oct: +2.3% yoy). The phenomenon of rising rental cost could imply that demand for property rental market remains resilient despite the sharp increase in residential supplies.

With Jan-Nov inflation rate already averaging 2.0% yoy, we fine-tune our 2013 full year CPI growth forecast by +0.1ppt to 2.1%, factoring in a Dec inflation rate of 3.1% yoy. We expect the CPI growth to average 2.7% in 2014, factoring in (i) electricity tariff hike (effective 1 Jan 14) and (ii) a further 10 sen fuel price hike in 2Q 2014. Our monthly simulation shows that CPI growth is likely to peak around 3.1% in 1Q 2014 before tapering off into the remaining months of the year.

We also note that rising inflation rate has caused the real return to savings (using 1-month FD rate as proxy) to turn zero (Figure #3). With CPI growth expected to hover around 3.1% yoy in 1H 2014, real return to savings will turn slight negative for the next few months. It is crucial to note that during the previous rate hike (May 2011), real return to savings had been negative for 4 consecutive months (as high as 0.5ppt) before BNM raised 25bps.

We do not expect the higher inflation outlook to immediately result in an imminent OPR hike. We expect BNM to stay pat and analyze the pass-through effect as well as the contractionary effect of Budget measures.

We expect BNM to hold OPR steady at 3.0% in 1H 2014 as it weighs the impact of a contractionary Budget (with an expected external improvement) against the pass-through effect from collective subsidy removals.

We expect slight tightening of 25bps in 2H 2014 should global growth strengthens in a synchronized manner while strong inflation pass-through is observed.

Source: Hong Leong Investment Bank Research - 19 Dec 2013