News

Malaysia’s CPI rose at a slower pace of 3.4% yoy in April, after pausing at 3.5% yoy in February and March. The figure was a tad lower than our and market consensus of 3.5% yoy.

During the month, major categories recorded largely stable growth (Figure #1), with lower food inflation more than offset higher price growth of the transport segment.

MoM basis, the CPI was flat after rising by 0.1% mom in March, ending fifteen consecutive month of sequential increase.

Comments

April inflation confirms that pass-through effect of the collective subsidy removals (i.e. electricity tariff & fuel price hike) has largely subsided. MoM basis, the CPI growth was as high as 0.3-0.8% during the period of Sep13-Feb14.

The moderation in April inflation, however, reflected mainly easing of raw food prices as supply disruption and high festive demand since end-2013 normalized.

Of significance, services inflation continued to edge higher to 3.2% yoy (Mar: +3.1% yoy) with a MoM growth of 0.2%, suggesting that inflationary pressure is still evident.

The housing & utilities segment recorded a stable growth of 3.6% yoy after rising from a low of 1.3% yoy in Apr13, driven mainly by high actual rental for housing (+3.5% yoy).

The decline in food prices (-0.1% mom) was mainly on account of lower prices of meat (-1.0% mom) and vegetables (-0.4% mom).

We have raised our 2014 full year CPI growth forecast to 3.2% given the assumption of stronger domestic demand growth (GDP growth forecast of 5.5%). Nevertheless, we still opine that inflation rate has probably peaked at 3.5% and is now likely to hover around this level before tapering off as the government delays further subsidy removal.

The 20% hike in gas price for non-power sector from 1 May is expected to have minimal impact as the glove sector is export-oriented while the steel sector faces price competition from import substitution.

Real return to savings is in its fifth month of negative territory (Figure #3). Incoming loan-deposit data would be crucial to determine whether the negative real rates have deteriorated to become a destabilizing factor.

With the stronger-than-expected GDP growth (+6.2% yoy in 1Q14), we believe the case of an early rate hike is now justified. Moreover, domestic demand growth did not slow down as envisaged while the construction sector received more boosters primarily from the residential sector. A preemptive rate hike may now be required to prevent overheating in domestic demand (incl. residential property) which will compromise financial stability while potentially fanning second round inflation.

Reinforced by the hawkish MPS, we expect BNM to hike 25bps in its July MPC meeting. We expect BNM to stay pat thereafter to assess the evolution of growth, inflation and financial data related to the property sector.

Source: Hong Leong Investment Bank Research - 22 May 2014