Headline inflation improves to 1.4% yoy in October

Core inflation improved to 2% yoy in Oct as transport costs fall

Malaysia’s headline inflation improved from 1.5% yoy in September to 1.4% in October, slightly below market expectations of 1.5%. This was due to improvement in prices of food and non-alcoholic beverages, which eased from 3% yoy in September to 2.5% in October. Despite the rise in domestic retail petrol prices (RON95, +0.10sen to RM1.80/litre), (RON97, +0.10sen to RM2.10/litre) and (diesel, +0.05sen to RM1.85/litre) for October 2016, costs of transport continued to fall by 5.5% yoy, the same as in September, on the high base in the corresponding period of last year.

Cost of communications also declined by a flat rate of 2.6% yoy in October, the same as in September, due to lower prices of telephone & telefax services. As such, core inflation also improved from 2.1% yoy in September to 2% in October. On a quarterly basis, the country’s headline inflation, as measured by the consumer price index (CPI), improved from 1.9% yoy in 2Q16 to 1.3% in 3Q16, before picking up slightly to 1.4% in October, which we believe will continue to trend higher over the November-December period, due to a further rise in domestic retail petrol prices, indicating that inflationary pressure in the economy is gradually increasing. Petrol (RON95 & 97) and diesel carry a weight of around 8.5% in the CPI basket.

Our inflation rate forecasts remain at 2.2% in 2016 and 2.7% in 2017

On a cumulative basis, the headline inflation rose by 2.1% yoy over 10M16 (2.0% in 10M15). We are maintaining our full-year inflation rate of 2.2% in 2016E and 2.7% in 2017E, respectively, as compared to the official forecast of 2-2.5% in 2016 and 2.0-3.0% in 2017.

In the latest MPC statement, with the BNM signalling that the “global economy continued to grow at a moderate pace”, and adding that “the baseline estimate is for global growth to improve slightly in 2017,” we expect the stance of monetary policy will continue to remain accommodative. However, in view of recent periods of volatility in the regional financial and foreign exchange markets, as reflected in the weakness of Ringgit, even if economic activities deteriorated externally going into 2017, we believe the BNM may not have full flexibility to cut its OPR rate in early 1H17, especially with volatile capital flows. As such, the BNM will likely hold its OPR at 3.0% throughout 2017.

Source: Affin Hwang Research - 28 Nov 2016