Headline inflation rose slightly to +1.4% YoY (Mar: +1.3% YoY), lower than estimate of +1.6% YoY. The slower-than-forecasted rise was due lower increase in F&B sub-sector, modest rise in transportation sub-sector and decline in clothing and footwear sub-sector. Following the government’s announcement to zerorise the GST and stabilise the petrol prices, we reduce our inflation projection to 1.8% YoY (current: 2.7% YoY), also aided by slower than expected rise in F&B sub-sector. This reinforces our expectation for BNM to maintain the OPR at 3.25% for the rest of the year.

DATA HIGHLIGHTS

Headline inflation increased slightly to +1.4% YoY in April (Mar: +1.3% YoY) lower than estimate of +1.6% YoY. The slower-than-expected rise was due to slower rise in food and beverage sub-sector, decline in clothing and footwear sub-sector and modest increase transportation sub-sector.

On MoM basis, CPI was flat after declining by -0.4% in the previous month. Core inflation moderated to +1.5% YoY (Mar: +1.7% YoY).

Transportation category registered a modest increase (+0.4% YoY; Mar: -1.5% YoY) as the base effect eased. In April, retail petrol prices remain unchanged throughout the month. Average prices of RON95 and RON97 were maintained at RM2.20 and RM2.47 respectively. Nevertheless, transportation sector rebounded slightly as petrol prices registered slower annual increase in April 2017 (+16.7% YoY) in comparison to March 2017 (+23.0% YoY), effectively muting the base effect in April 2018. Transportation sub-sector’s added +0.1 ppt to overall headline inflation (Mar: -0.2ppt).

Food inflation continued to edge lower for the fourth consecutive month to +2.6% YoY (Mar: +2.8% YoY). This follows the decline in global food prices due to favourable global supply conditions. Vegetable prices contracted by -0.5% YoY (Mar: +0.9% YoY), while meat prices slowed to +1.1% YoY (Mar: +1.6% YoY) as well as fish and seafood prices (+4.1% YoY; Mar: +4.6% YoY). On the other hand, wheat prices rose at a slightly higher pace (+1.7% YoY; Mar: +1.6% YoY).

Services inflation remained at +2.2% YoY as the slower increase in furnishing, household equipment and maintenance (+1.8% YoY; Mar: +2.1% YoY) was offset by the larger rise in restaurant sector (+2.2% YoY; Mar: +2.0% YoY).

Core inflation (DOSM) also moderated to +1.5% YoY (Mar: +1.7% YoY). Major groups that influenced the rate were food and beverage inflation (2.8% YoY; Mar: +3.0% YoY), contraction in clothing and footwear (-0.8% YoY; Mar: -0.7% YoY) that offset the increase in health prices (+2.1% YoY; Mar: +2.0% YoY).

HLIB’s VIEW

Following the government’s announcement to “zerorise” the GST rate in June 2018 and stabilise the petrol prices, we reduce our CPI forecast to 1.8% YoY from 2.7% YoY. The slower-than-expected increase in food prices have also led to further moderation to overall headline inflation. This reinforces our expectations for BNM to maintain the OPR at 3.25% for the rest of the year as we also 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.

Source: Hong Leong Investment Bank Research - 24 May 2018