OVERVIEW

• Consumer price inflation edged down to 1.4% YoY in October from 1.5% in September, below the consensus expectation of 1.5% YoY but matched the house estimate. It, however, edged up 0.3% MoM.
• Food & Non-Alcoholic Beverages moderated to 2.5% YoY from 3.0% in September. By category, Transport deflation remained unchanged at 5.5% YoY in October despite a monthly rise in petrol fuel prices.
• We expect to see elevated inflationary pressure in the remaining two months of the year, bringing full-year inflation to 2.1% YoY. However, we see inflation to stay relatively higher next year, partly in consideration of several price hike announcements set to be in effect next year. Along with expected improvement in domestic demand next year, we maintain our 2017 full-year inflation at 2.3%.
• Though we believe there is room for Bank Negara Malaysia (BNM) to ease the monetary policy, the likelihood of a rate cut is fairly limited on account of weakening ringgit and the volatile financial markets. On the expectation that the economy is stabilizing, BNM is likely to maintain the overnight policy rate at 3.00% in 2017.

The Consumer Price Index (CPI) inched lower to 1.4% YoY in October from 1.5% in the previous month. The headline inflation was below the consensus expectation of 1.5% but matched the house estimate. A moderation in the Food & Non-Alcoholic Beverages category was largely the reason behind the weaker headline inflation in October.

On a monthly basis, the CPI rebounded 0.3% following a 0.3% decline in September. This was mainly due to the monthly increase in transportation cost on the back of rising petrol fuel prices in October. The year-to-date growth for CPI was 2.1% YoY compared to 2.0% in the corresponding period a year ago. Meanwhile, core inflation softened for the second month to 2.0% YoY from 2.1% YoY in September.

The Food & Non-Alcoholic Beverages index with a 30.2% share of the CPI moderated to 2.5% YoY from 3.0% in September. This is largely on account of the sub-category “Food at Home” experiencing softer inflation in October, led by moderation of food prices including meat, vegetables, milk and eggs. Similarly, the United Nations Food and Agriculture Organisation’s (FAO) Food Price index growth slowed to 9.1% YoY in October from 10.4% in September. On a monthly basis, Food & Non-Alcoholic Beverages index declined at a faster pace of 0.3% compared with a 0.2% drop in September.

Inflation in the Housing, Water, Electricity, Gas & Other Fuels category (23.8% share of CPI) remained stable at 2.1% YoY in October. On a monthly basis, the index stayed unchanged for the second consecutive months.

Transport cost fell at the same pace of 5.5% YoY as in September, partly contributing to the stable headline inflation in October. On a monthly basis, however, the transport index rose at the fastest pace in six months at 3.1%. This can mostly be attributed to the October increase in petrol fuel price, the main determinant of transport cost. The unleaded and diesel fuel price rose by 10 sen and 5 sen respectively in October.

The inflation in world’s major economies continued to gain momentum in October, paving the way for a reversal of the prevalent monetary easing actions from world central banks in the last decade. Inflation in Eurozone and U.S. registered a 28- month and two-year high of 0.5% YoY and 1.6% YoY respectively in October. China inflation also accelerated to a six-month high of 2.1% YoY in October. Meanwhile, Singapore experienced less deflationary pressure (-0.1% YoY) in October in a positive sign for the trade-reliant economy.

Outlook

Elevated near-term inflation. Going forward, we are likely to see elevated inflationary pressure in the remaining two months of the year. The subsidy rationalization of cooking oil set to be in effect in November is poised to cause higher inflation in the Food & Beverages category, which carries the largest weight for the headline inflation. In addition, transport cost is set to increase following the upward adjustment of fuel petrol prices by 15 sen to the highest level for the year in November. Meanwhile, the recent weakness in ringgit, which saw the currency depreciated about 5.5% against the US dollar in November, will imply rising imported inflation and higher headline inflation in the near term. As such, we expect headline inflation to trend higher to around 1.6% - 2.0% in the coming two months, bringing full-year inflation to 2.1% YoY.

Stable 2017 outlook. We concur with BNM that “inflation is expected to remain relatively stable in 2017 given the environment of low global energy and commodity prices, and generally subdued global inflation.” However, we also expect inflation to stay relatively higher next year. For now there are several price hike announcements set to be in effect next year including airport tax increase, government hospital room rates adjustment as part of ongoing government subsidy rationalization plan and a possible sugar price hike. Along with expected improvement in domestic demand next year, we maintain our 2017 full-year inflation at 2.3%.

Policy rate likely to stay pat in 2017. Though we believe there is room for BNM to ease the monetary policy judging by the slower inflation and the economic uncertainty, the likelihood that BNM would cut interest rates is fairly limited on account of weakening ringgit and the volatile financial markets. On the expectation that the economy is stabilizing, BNM is likely to maintain the overnight policy rate at 3.00% in 2017.

Source: Kenanga Research - 28 Nov 2016