News

• Headline inflation eased for the fourth consecutive month in June to +1.6% yoy (May: +2.0% yoy) lower than consensus estimate of +1.8%.

• The moderation in CPI was a result of larger decline in transport component and moderation in services inflation that more than offset the increase in food and non-alcoholic beverage inflation.

• On mom basis, CPI rose for the third consecutive month, recording an increase of +0.2% (May: +0.3%)

• Core inflation remained unchanged at +2.1% yoy in June.

Comments

• The continued moderation in June headline inflation was mainly on account of the lapse of GST effect after a full year of implementation.

• Most of the CPI components recorded weaker figures in June, with the exception of food & non-alcoholic beverages as well as clothing & footwear (+4.2% yoy; -0.6% yoy respectively; May: +4.1% yoy; -0.9% yoy respectively).

• Transport prices registered a larger decline of -8.5% yoy (May: -5.6% yoy) following a higher base as RON95 traded above RM2 per litre during the same period last year. Prices of RON95, RON97 and diesel remained steady at RM1.70, RM2.05 and RM1.55 respectively in June.

• Food price inflation rose to +4.2% yoy (May: +4.1% yoy) mainly due to lagged impact of imported inflation. Within the food sub-segment, higher inflation was seen in prices of fish & seafood (+7.8% yoy; May: +6.6% yoy). Vegetable prices moderated as the impact of El Nino tapered off, but remained high at +12.5% yoy; May: +15.3% yoy).

• Services inflation eased to +2.3% yoy (May: +2.4 yoy) further indicating that GST impact has already diminished after a full year of implementation. Growth of major service components moderated during the month, i.e. restaurants & hotels (+2.2% yoy; May: +2.5% yoy) and recreation services and culture (+1.4% yoy ; May: +1.5% yoy).

• Core inflation (DOSM) remained steady at +2.1% yoy after hitting a high of +3.8% yoy in Dec-15 and remaining stable thereafter at +2.9% yoy in Jan-Jun 2016, due to slower inflation rate across non-food segments.

• With the easing of both core and services inflation, we expect demand-driven inflation to be contained mainly on moderate consumption growth outlook.

• We believe CPI growth had al ready peaked in Feb at 4.2% yoy. Given the lower-than-expected June CPI growth, we downgrade our CPI growth forecast to 2.2% (previously 2.5%). Our forecast is at the lower bound of BNM revised inflation forecast of 2.0-3.0% for 2016 (previous: 2.5% - 3.5%). Our RON95 assumption has also been revised downwards to RM1.73/litre (previous: RM1.75/litre).

• Coupled with receding financial imbalances, a sustained easing of inflation beyond the lower bound of BNM targeted range of 2-3% accords room for further easing. We expect BNM to cut the OPR by another 25bps by year-end.

Source: Hong Leong Investment Bank Research - 21 Jul 2016