Inflation Improved Sharply to 1% Yoy in 2018 From 3.8% in 2017

Malaysia’s headline inflation was unchanged at 0.2% yoy in December for the second consecutive month, and lower than market expectations of 0.3%. However, on a month-on-month basis, inflation eased to 0.1% in December (0.2% in November). For the full year, inflation improved sharply and averaged 1% yoy compared to 3.8% in 2017. This was reflected in lower cost of transport, from 13.2% yoy in 2017 to 1.6% in 2018, making this the lowest annual inflation rate since 2009. Core inflation, which excludes administered and volatile price items, improved to 0.4% yoy from 0.5% in November, after three consecutive months of increases weighed down by transport costs.

In December, inflation was pressured by higher cost of alcoholic beverages & tobacco, which rose for a second straight month to 1.1% yoy, from 1% in November, its fastest growth since November 2016, led by the upward revision in cigarette prices in November after the increase in taxes under Regulation 8A of the Tobacco Control Regulation 2004. Besides that, higher costs were seen in restaurants & hotels (+1.3%) and furnishings and household equipment (+0.1%), while prices of food and non-alcoholic beverages and education eased to 0.7% yoy and 1.1%, respectively. Cost of transport declined for the second consecutive month albeit at a slower pace of -2% yoy in December (from -2.3% in November). This was partly attributed to the retail RON95 pump price, which was fixed at RM2.20/litre in December, vs. RM2.27/litre in the same month in 2017.

Going into 2019, we expect the full-year inflation to average around 2.0- 2.2% projected for 2019, higher than 1.0% in 2018, attributed partly to the proposed reintroduction of targeted fuel subsidies in 2H19 as well as some pressure from the sales-and-services tax (SST). However, the impact would likely to be manageable due to the reintroduction of the weekly float for RON95, which began on 1 January 2019. For the week of 19-25 January 2019 the price of RON95 was set at RM1.98/litre, compared to RM2.28/litre in the same month in 2017. The country’s headline inflation will likely be influenced by the direction of global oil prices going forward, which we believe will be trending gradually higher. While BNM cautioned that risks to the global growth outlook remain tilted to the downside (possible further escalation in trade tensions), we believe BNM will likely hold its overnight policy rate (OPR) at 3.25% throughout 2019 as domestic demand should support sustained healthy economic expansion.

Source: Affin Hwang Research - 25 Jan 2019