News

• Headline inflation decelerated to +3.4% yoy in November (Oct: +3.7% yoy), matching consensus estimate.

• The moderation was due to slower annual growth in the food & beverages and transportation sub-sectors amid higher base effect a year ago.

• On mom basis, CPI rose by +0.7%, reversing the decline of -0.2% in the previous month. Core inflation moderated for the second consecutive month to 2.2% (Oct: 2.3%).

Comments

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

• Transport category moderated to +10.8% yoy (Oct: +12.1% yoy) on account of base effect despite the increase in petrol pump price during the month. In November, retail petrol prices rose. Average prices of RON95 and RON97 were higher at RM2.31 and RM2.60 respectively (Oct: RM2.17 and RM2.47 respectively). Of significance, transportation sub-sector contributed +1.5 ppts to overall headline inflation.

• Food inflation edged slightly lower to +4.0% yoy (Oct: +4.4% yoy). In particular, oils and fats moderated sharply to +1.5% (Oct: 16.2% yoy) as the effect of subsidy removal fades. The slowdown in the oil and fats category offset the rise in other food inflation components, such as fish and seafood inflation (7.6% yoy; Oct: 6.8% yoy) and fruit inflation (4.2% yoy; Oct: 4.0% yoy).

• Services inflation trended slightly lower to +2.7% yoy (Oct: +2.8% yoy), as the rise in restaurants and hotels (+2.8% yoy; Oct: +2.7% yoy) was offset by the moderation in furnishings, household equipment and routine household maintenance of 2.5% yoy (Oct: +2.6% yoy).

• Core inflation (DOSM) was slightly lower at 2.2% yoy (Oct: +2.3% yoy) due to a slower rise in food and beverage inflation (+3.6% yoy; Oct: +4.0% yoy).

• The further moderation in November inflation was expected as transportation category as well as fat and oil sub-set category were affected by base effect a year ago.

• 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 in 2018.

• 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 should policy rates remain overly accommodative.

• While BNM is expected to normalise 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 - 21 Dec 2017