HIGHLIGHTS

Inflation in the month of February edged up by 3.5% YoY, higher than market expectation of 3.4% (but spot on with ours), due to continued pressures from an increase in the electricity tariff and the implementation of the minimum wage. This is the highest level seen since March 2009. The core inflation (minus food and beverages) increased by 3.3%, the highest rate seen since November 2008. On a monthly comparison, the CPI rate rose by 0.3% MoM. For the first two months of the year, inflation averaged at 3.5%.

The prices of food and beverages is finally seen to taper off, rising by 3.9% YoY (January: 4.2%) after months of being elevated as a result of festivities celebrated during the year-end as well as religious and cultural festivities throughout January. Compared to the previous month, prices of food and beverages fell by 0.1% MoM. On broader scope, the global food inflation as measured by the United Nation’s Food & Agriculture Organization (FAO) saw an increase of 2.6% YoY due to an increase in the prices of sugar, oils, cereals and dairy.

The housing, water, electricity, gas and other fuels index recorded a 3.5% YoY (January: 3.2%) increase, and a 0.7% rise MoM. Being able to more or less remove the increased usage due to festivities, we are able to see more clearly the effects of the rise in electricity tariffs on the economy. Though not expected to impact majority of households directly, the price increase for commercial and industrial usage would end up being priced in for the buyers, hence putting pressure in other industries and sectors throughout the economy.

The transportation index rose by 5.5% YoY, higher than 5.3% seen previously. Though one could argue that this is due to ongoing pressures from the rise in petrol prices at the end of 2013, at 0.3% MoM, it is evident that the pricing has begun to normalize. Though there is every possibility of another petrol subsidy rationalization some time this year as the government commits to fiscal consolidation, the situation of the domestic economy going through a phase of moderation due to the price increments already imposed makes it less likely. With an expectation of further price increases when the GST is implemented in April 2015, a prolonged period of a lackluster domestic demand could end up impeding overall economic growth, a situation best avoided especially whence the government is striving to achieve a developed nation status by 2020.

On broader view, the price of Brent ended the month at US$109.71 (-2.1% YoY) whilst U.S crude settled at US$102.6, 11.5% higher than last year. More recently, prices of crude have been volatile due to uncertainties in Crimea leading to sanctions against Russia, the world’s 2nd largest oil producer. U.S crude last settled at US$99.6/barrel and Brent at US$106.9/barrel.

Outlook

We concur to Bank Negara’s projection that the inflation rate this year will be higher than its long-term average and we believe that it would average around 3.3%. Due to the fact that this is largely due to cost-push inflation as a result of the government balancing their books, we do not think that BNM will touch the Overnight Policy Rate anytime soon, keeping it at 3.00% for the rest of the year and possibly well into the later part of 2015. Inflationary pressures are seen to be non pervasive and its merely a matter of keeping belts tight while waiting for things to normalize again.

Source: Kenanga