News

• Headline inflation moderated to +1.4% yoy in February (Jan: +2.7% yoy) lower than estimate of +1.9% yoy.

• The deceleration was due to broad-based moderation in most sub-sectors as well as decline in transportation sub sector.

• On mom basis, CPI rose by +0.1%, a slower pace compared to January’s growth of +0.3%. Core inflation moderated to +1.8% yoy (Jan: +2.2% yoy).

Comments

• The slower inflation reading was mainly on account of broad-based moderation in almost all sub-sectors as well as contraction in transportation price growth.

• Transport category registered its first decline in 13 months (-0.3%; Jan: +5.7% yoy) due to lower petrol prices during the month, compounded by high base effect a year ago. In February, retail petrol prices declined slightly in accordance to lower global oil prices. Average prices of RON95 and RON97 were lower at RM2.26 and RM2.53 respectively (Jan: RM2.29 and RM2.56 respectively). Consequently, transportation sub-sector’s contribution to overall headline inflation was almost flat (-0.05ppt; Jan: +0.7 ppts).

• Food inflation edged lower to +3.0% yoy (Jan: +3.8% yoy) also partly due to base effect. Vegetable prices slowed to +1.7% yoy (Jan: +7.6% yoy) as well as rice, bread and other cereals category (+1.6% yoy; Jan: +1.7% yoy). Meat prices registered a decline of -0.6% yoy (Jan: +1.9% yoy).

• Services inflation was slightly lower at +2.3% yoy (Jan: 2.6% yoy), driven by the moderation in restaurants and hotels prices (+1.8% yoy; Jan: +2.4% yoy) and education sector (+1.1% yoy; Jan: +1.2% yoy).

• Core inflation (DOSM) was lower at +1.8% yoy (Jan: +2.2% yoy). Major groups that influenced the rate were food and beverage inflation (+3.1% yoy; Jan: +3.5% yoy), contraction in clothing and footwear (-0.7% yoy; Jan: -0.3% yoy) as well as communication prices (-0.5% yoy; Jan: - 0.6% yoy).

• Headline inflation is anticipated to remain moderate in the near-term as the high base effect from transportation category sector fades 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 latest Mar MPC statement, BNM maintains its projection for inflation to average lower in 2018 on expectations of smaller effect from global cost factors.

• Likewise, 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. 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 - 22 Mar 2018