News

• Headline inflation decelerated to +3.7% yoy in October (Sep: +4.3% yoy), below consensus estimate of 4.0% yoy.

• The slower rise mainly emanated from slower annual growth in the food & beverages and transport sub-sector due to lower monthly petrol prices and lower base effect.

• On mom basis, CPI declined by -0.2% in October, the first decline in three months. Core inflation was slightly lower at 2.3% (Sep: +2.4%).

Comments

• The deceleration in inflation reading was mainly on account of slower food & beverages price growth and slower transportation price inflation.

• Transport category moderated to +12.1% yoy (Sep: +15.8% yoy) due to lower pump prices, in line with the moderation in global crude oil prices during the month. In October, retail petrol prices moderated. Average prices of RON95 and RON97 were lower at RM2.17 and RM2.47 respectively (Sep: RM2.19 and RM2.48 respectively). Of significance, transportation sub-sector contributed a substantial boost of +1.6 ppts to headline inflation.

• Food inflation edged slightly lower to +4.4% yoy (Sep: +4.6% yoy). In particular, fish and seafood inflation trended lower to 6.8% yoy (Sep: +8.0% yoy) which offset a rise in fruit inflation (+4.0% yoy; Sep: +3.9% yoy) and increase in vegetable inflation (+5.0% yoy; Sep: +4.8% yoy). Oils and fats continued to see an increase of +16.2% yoy (Sep: 39.6% yoy) due to removal of oil subsidy.

• Services inflation trended slightly higher to +2.8% yoy (Sep: +2.7% yoy), as the rise in restaurants and hotels (+2.7% yoy; Sep: +2.6% yoy) more than offset the slower growth in furnishings, household equipment and routine household maintenance of 2.6% yoy (Sep: +2.8% yoy).

• Core inflation (DOSM) was slightly lower at 2.3% yoy (Sep: +2.4% yoy) due to a slower rise in food and beverages inflation (+4.0% yoy; Sep: +4.5% yoy).

• The moderation in October inflation was expected as pump prices for petrol and diesel were lower during the month. In November, despite the rise in monthly pump prices, headline inflation is anticipated to moderate further as base effect fades.

• We expect domestic demand-led inflation to be contained, consistent with moderation in core inflation. However, the robust export sector may have strong spillover on domestic demand which could feed to sustained core inflation.

• Despite the moderation in inflation, we opine that BNM has turned its attention to the prolonged period of negative real interest rate (10 th consecutive month) and signs of property imbalances.

• While BNM is expected to normalize the interest rate by 25bps as early as January 2018, we do not expect BNM to start a rate hike cycle as inflation is expected to moderate into 2018 while oil prices remain range-bound.

Source: Hong Leong Investment Bank Research - 27 Nov 2017