Headline inflation moderated further to 1.3% YoY (Feb: 1.8% YoY), lower than estimate of +1.6% YoY. The deceleration was due to moderation in food and beverage sub-sector and decline in transportation sub-sector. Headline inflation is expected to pick up slightly as the impact of base effect ebbs off. We continue to expect demand-driven inflation to be relatively contained and financial imbalance to be kept in check as indicated by real interest rates in the positive territory. Hence, we maintain our projection for BNM to maintain the OPR at 3.25% for the rest of the year.

DATA HIGHLIGHTS

Headline inflation moderated further to +1.3% YoY in March (Feb: +1.8% YoY) lower than estimate of +1.6% YoY. The deceleration was due to moderation in food and beverage sub-sector and decline in transportation sub-sector.

On MoM basis, CPI declined by -0.4%, partly reversing the gains over the last two months (Feb: +0.1%; Jan: 0.5%). Core inflation moderated to +1.7% yoy (Jan: +1.8% YoY).

Transportation category registered a bigger decline (-1.5% YoY; Feb: -0.3%) due to lower petrol prices during the month, compounded by high base effect a year ago. In March, retail petrol prices declined slightly in accordance with stronger ringgit (USD/MYR 3.9028; Feb: USD/MYR 3.9128) and lower refined oil prices (MOGAS92: USD72.37/barrel; Feb: USD73.43/barrel). Average prices of RON95 and RON97 were lower at RM2.20 and RM2.47 respectively (Feb: RM2.26 and RM2.53 respectively). Consequently, transportation sub-sector’s detracted -0.2 ppt to overall headline inflation (Feb: -0.02ppt).

Food inflation edged lower to +2.8% YoY (Feb: +3.0% YoY), possibly due to appreciation of ringgit and seasonal factors. Vegetable prices slowed to +0.9% YoY (Feb: +1.7% YoY), similar to fish and seafood prices (+4.6% YoY; Feb: +5.8% YoY). In addition, fruit inflation also moderated to +2.0% YoY (Feb: +2.5% YoY) On the other hand, meat prices rebounded in March after recording a decline in February (+1.6% YoY; Feb: -0.6% YoY).

Services inflation was slightly lower at +2.2% YoY (Feb: 2.3% YoY) driven by larger decline in the communication sector (-0.7% YoY; Feb: -0.5% YoY).

Core inflation (DOSM) also moderated to +1.7% YoY (Feb: +1.8% YoY). Major groups that influenced the rate were food and beverage inflation (+3.0% YoY; Feb: +3.1% YoY), contraction in clothing and footwear (-0.7% YoY; Feb: -0.7% YoY) as well as communication prices (-0.7% YoY; Feb: -0.5% YoY).

HLIB’s VIEW

We opine that headline inflation has already bottomed in March and we expect the reading to pick up slightly as the impact of base effect ebbs off. At the same time, we expect demand-driven inflation to be relatively contained and financial imbalance to be kept in check as indicated by real interest rates remaining in positive territory. Hence, we maintain our expectation for BNM to maintain the OPR at 3.25% for the rest of 2018.

Source: Hong Leong Investment Bank Research - 19 Apr 2018