News

• Headline inflation moderated to +2.7% yoy in January (Dec: +3.5% yoy) slightly lower than estimate of +2.8% yoy.

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

• On mom basis, CPI rose by +0.3% (Dec: +0.1%). Core inflation remained steady at 2.2% (Dec: 2.2%).

Comments

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

• Transport category grew by +5.7% yoy (Dec: +11.5% yoy) on account of base effect despite the slight increase in petrol pump price during the month. In January, retail petrol prices rose slightly. Average prices of RON95 and RON97 were higher at RM2.29 and RM2.56 respectively (Dec: RM2.27 and RM2.55 respectively). Consequently, transportation sub-sector contributed +0.7 ppts, half the contribution in the previous month (+1.5 ppts).

• Food inflation edged slightly lower to +3.8% yoy (Dec: +4.1% yoy) also partly due to base effect. The moderation in meat prices (+1.9% yoy; Dec: +3.6% yoy) and fish & seafood price (+5.0% yoy; Dec: +6.9% yoy) offset the rise in milk and egg prices (+2.5% yoy; Dec: +1.8% yoy).

• Services inflation was slightly lower at +2.6% yoy (Dec: +2.7% yoy), driven by the moderation in restaurants and hotels prices (+2.4% yoy; Dec: +2.6% yoy) and education sector (+1.2% yoy; Dec: +1.7% 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 (+3.5% yoy; Dec: +3.6% yoy), housing, water, electricity, gas (+2.2% yoy; +2.5% yoy), restaurants & hotels (+2.2% yoy; Dec: +2.6% yoy).

• The slowdown in January inflation was expected as the high base effect from transportation category as well as food and beverage sector fade off.

• After BNM raised the OPR by 25bps in January 2018, real interest rates turned around to positive territory after recording negative real rates for twelve consecutive months. In the Jan MPC 2018, BNM also stated that the increase in policy rate was to prevent the build-up of financial risks.

• In 2018, we expect inflation to grow at a more moderate pace as oil prices remain range-bound and the appreciation of ringgit feeds into lower import costs. We expect domestic-demand inflation to be contained, consistent with steady core inflation. Hence, we maintain our expectation for BNM to maintain the OPR at 3.25% for the rest of 2018. Nevertheless, should growth surprise on the upside, we do not rule out the possibility of BNM raising the OPR in 2H 18.

Source: Hong Leong Investment Bank Research - 1 Mar 2018