News

Malaysia’s headline inflation inched down to 3.2% yoy in July (June: +3.3% yoy), a tad lower than our and market expectations of 3.3% yoy.

Slower CPI growth in July was due to the smaller price increases in food and transport components as well as steady price inflation in housing, utilities and other fuels. Other major components generally posted stable growth.

MoM basis, the CPI growth also slowed to 0.1% after posting a higher 0.2% in June.

Comments

July’s CPI reading reaffirmed our view that inflation rate is on a downward trend after peaking at 3.5% in March 2014. Core inflation (excl. fuel and food & non-alcoholic beverages), on the other hand, still hovered at 2.5% yoy in July (June: +2.6% yoy), well above the 2012-13 average rate of 1.2%, largely due to low base effects a year ago.

Food price inflation eased to 3.1% yoy in July (June: +3.5% yoy) despite higher demand during Ramadan and Aidilfitri in Jul-Aug. This was partly credited to Price Control Scheme effective from 20 July until 5 Aug. Notable decreases were seen in fish & seafood and meat.

Similarly, transport price inflation edged lower to 5.4% yoy (June: +5.5% yoy), thanks to steady fuel prices and mild impact of the additional 10% surcharge on express bus fare during Hari Raya travel period.

The CPI growth of housing & utilities segment held unchanged at 3.2% yoy, reflecting stable rental rate for housing as well as electricity and water tariffs.

The services inflation remained stable at 3.1% yoy for the third month as the sustained price deflation in communication segment offset the tiny uptick in health, education and restaurants & hotels segments.

We keep our 2014 full-year inflation estimate at 3.2% (2013: +2.1%) after taking into account the impact of multitiered fuel subsidy scheme, which is widely expected to be implemented in September. Our estimation revealed that the impact of a multi-tiered fuel subsidy scheme is broadly equivalent to the impact of a 20 sen fuel price hike, which historically had raised the inflation rate by ~0.8ppt in the month and ~0.4ppt indirect impact in the following month.

The negative real interest rate (Figure #3) narrowed to 0.14% in July (June: -0.37%) following the 25bps interest rate hike in the month. We believe the real return to savings will turn neutral/positive if inflation continues to ease. However, positive real interest rate will be short-lived as the implementation of GST in April 2015 is expected to add ~1.3ppts to the headline inflation for 2015.

While the downward trend in inflation offers relief against an imminent rate hike by BNM, we still expect BNM to raise its OPR by 25bps to 3.50% on 18 September given: (i) 2014 full-year GDP growth is almost certain to surpass the upper-end of BNM’s forecast of 4.5-5.5%; and (ii) renewed upside risks to demand-driven inflation given potential second-round effects following the revamp of fuel subsidy scheme and implementation of GST.

Source: Hong Leong Investment Bank Research- 21 Aug 2014