News

• Headline inflation rose to +3.5% yoy in December (Nov: +3.4% yoy), to reach a full year inflation growth of +3.8% (2016: +2.1% yoy), matching estimate.

• The increase was due to faster annual growth in the food & beverages and transportation sub-sectors.

• On mom basis, CPI rose by +0.1%, recording its second consecutive increase (Nov: +0.4%). Core inflation remained steady at 2.2% (Nov: 2.2%).

Comments

• The faster inflation reading was mainly on account of higher food & beverages as well as transportation price growth.

• Transport category grew by +11.5% yoy (Nov: +10.8% yoy) on account of lower base effect despite the decline in petrol pump price during the month. In December, retail petrol prices moderated slightly. Average prices of RON95 and RON97 were lower at RM2.27 and RM2.55 respectively (Nov: RM2.31 and RM2.60 respectively). Nevertheless, transportation sub-sector contributed +1.5 ppts to overall headline inflation.

• Food inflation edged slightly higher to +4.1% yoy (Nov: +4.0% yoy). The increase in meat prices (+3.6% yoy; Nov: +2.9% yoy), milk and egg (+1.8% yoy; Nov: +0.3%yoy) offset the moderation in fish & seafood price (+6.9% yoy; Nov: +7.6% yoy) as well as fruits price (+3.0% yoy; Nov: +4.2% yoy).

• Services inflation remained stable at +2.7% yoy (Nov: +2.7% yoy), as the moderation in restaurants and hotels prices (+2.6% yoy; Nov: +2.8% yoy) was offset by higher prices in education sector (+1.7% yoy; Nov: +1.5% yoy).

• Core inflation (DOSM) was steady at 2.2% yoy (Nov: +2.2% yoy). Major groups that influenced the rate were food and beverage inflation (+3.8% yoy; Nov: +3.6% yoy), housing, water, electricity, gas prices (+2.5% yoy; Nov: +2.6% yoy), restaurants & hotels (+2.6% yoy; Nov: +2.8% yoy) and health (+2.3% yoy; Nov: +2.2%).

• The slight uptick in December inflation was expected as the lower base effect from transportation category provided an uplift to overall headline inflation.

• Real interest rates have been in the negative territory for 12 consecutive months while the recovery becomes more entrenched. Hence, we opine that BNM will normalise the interest rate by 25bps in 2018 and it could come as early as the upcoming MPC meeting on 25th January 2018 (i.e. today).

• However, we do not expect BNM to start a rate hike cycle as headline inflation is anticipated to moderate while domestic demand-led inflation remains stable. In 2018, we anticipate inflation to grow at a more moderate pace of +2.7% yoy (2017: +3.8% yoy), premised on the assumption global oil prices will moderate from its elevated levels as temporary factors (geopolitical concerns, weather-related factors) fade.

Source: Hong Leong Investment Bank Research - 25 Jan 2018