OVERVIEW

Inflation in April moderated slightly to 3.4%, lower than market consensus of 3.5%. This is mainly due to lower prices of food and beverages. However, core inflation remains elevated. Overall inflation may increase again soon due to the rise in natural gas prices. We reckon that CPI will average at 3.3% this year.

Due to the fact that inflationary pressures remain cost-push and still risky growth prospects due to China’s economic slowdown, raising interest rates would be BNM’s last resort.

- Inflation in March tapered somewhat, to 3.4% YoY following a 3.5% increase in March. The market had estimated a rise of 3.5%. This is on account of lower food prices, though from the core inflation (minus food and beverages), which remained at 3.3%, overall prices still remain elevated. For the first four months of the year, CPI averaged at 3.5%, compared to 1.6% seen in the same period in 2013. On a monthly comparison, there were no changes in the CPI rate.

- The prices of food and beverages rose at a slower pace of 3.6%, from 3.9% previously. On a monthly comparison however, prices fell by 0.1% MoM. Hopefully prices of food and beverages will remain stable for the rest of the year, barring demand-pull reasons during time of festivities and holidays.

- On broader scope, the global food inflation as measured by the United Nation’s Food & Agriculture Organization (FAO) saw a decline of 1.6% MoM due to a fall in dairy, sugar and vegetable oil prices. An annual comparison saw a 3.5% decline in food prices.

- The housing, water, electricity, gas and other fuels index remained at 3.6% YoY with no changes compared to the previous month. This index is most likely to remain on the high side, above its long-term average of 1.6% due to a rise of electricity tariffs at the start of the year. Though it has tapered off for now, there’s every possibility that it will increase in May on account of inflationary pressures from the 20% rise in natural gas prices. Despites the fact that it isn’t expected to directly impact the average residential consumer, commercial and industrial users are likely to increase prices of their goods due to the higher incurred costs.

- The transportation index increased by 5.3% from 5.1% previously. However, it only rose by 0.1% MoM, evidence that prices had normalized since the petrol price hike at the end of 2013. We expect this index to remain steady for a while yet.

- It should be noted that with the economy having performed better than expected in the 1Q14, it could be reason for the government to consider further reduction of subsidies later in the year. However, we feel that the Government should exercise caution because in spite of prices seemingly tapering off, it is still higher than the longterm average, putting a pinch to overall expenses. In addition to that, consumer spending in the 1Q14 moderated regardless of a boost from the festivities in the earlier part of the year. Wages and spending should be allowed to recover before any further subsidy rationalization is considered.

- On broader view, the price of Brent ended the month at US$107.8 (-2.1% YoY) whilst U.S crude settled at US$101.6, 4.5% higher than last year. Prices of crude have been on the rise due to tensions in Ukraine. U.S. crude last settled at US$103.8/barrel and Brent at US$109.6/barrel.

Outlook

- Though we are expecting another slight uptick in prices due to the rise in natural gas price, we do not think the impact will be as significant as that of petrol subsidy rationalization. However, inflationary pressures will remain for some time yet. We calculate that average inflation would be around 3.3% this year. Due to the cost-push nature of this inflation, we do not think that BNM will change the Overnight Policy Rate from 3.00% any time soon, despite many believing that better-than-expected GDP in the 1Q14 being a green light for BNM to do so. Furthermore, the rather uncertain growth prospect due to the impact of China’s growth slowdown may also be taken into consideration. We believe that BNM will implement further macro-prudential measures and will only adjust the OPR as a final resort.

Source: Kenanga