OVERVIEW

• Consumer price inflation rose to 1.8% YoY in November from 1.4% in October, above the consensus and house expectations of 1.6% YoY. On a monthly basis, inflation rose to an eight-year high of 1.0%.
• By category, Food & Non-Alcoholic Beverages accelerated to 3.8% YoY from 2.5% in October. Meanwhile, Transport index registered a smaller decline of 1.5% YoY (Oct: -5.5%) following an increase in fuel price.
• We forecast the CPI to expand to 1.7% YoY in 4Q16 (3Q16: 1.3%), bringing full-year inflation within our forecast of 2.1% YoY. Meanwhile, we believe inflation will likely stay higher next year on continued government subsidy rationalization plan, brighter outlook for crude oil prices and sustainable growth in domestic demand. Hence, we maintain our 2017 full-year inflation at 2.3%.
• Given the expectation of higher inflation, large capital outflows and the prospect of further U.S. Fed rate hike, we expect it would give BNM more reason to leave interest rates unchanged next year. Nevertheless we reiterate our view that the current stable inflation will provide room for BNM to ease the monetary policy if needed.

The Consumer Price Index (CPI) increased to 1.8% YoY in November from 1.4% in the previous month, beating the consensus and house expectations of 1.6% YoY. The increase was largely due to incidents of rising food and fuel prices in November. On a monthly basis, the CPI jumped to an eight-year high of 1.0% following a 0.3% decline in October. The year-to-date growth for CPI remained unchanged at 2.1% YoY in November. Meanwhile, core inflation quickened to 2.2% YoY from 2.0% YoY in October.

The Food & Non-Alcoholic Beverages index with a 30.2% share of the CPI expanded to 3.8% YoY from 2.5% in October. A combination of higher import bill for imported food (thanks to the weak ringgit), a fuel price hike and the removal of cooking oil subsidy contributed to the monthly increase in the CPI. This is largely reflected on higher inflation among foods consumed at home, which include those that are imported, mainly meat, vegetables, milk, cheese & eggs. Following the government’s decision to remove its subsidy on cooking oil, its average retail price surged 45.6% YoY. On a similar note, the United Nations Food and Agriculture Organisation’s (FAO) Food Price index growth increased to 10.4% YoY in November from 8.8% in October. On a monthly basis, Food & Non-Alcoholic Beverages index rose at the fastest pace of 1.0% in eight years.

Inflation in the Housing, Water, Electricity, Gas & Other Fuels category (23.8% share of CPI) remained unchanged at 2.1% YoY in November. On a monthly basis, the index increased 0.5% mainly due to a 0.7% MoM increase in rental.

The transport index registered a smaller decline of -1.5% YoY in November compared to -5.5% in the previous month. On a monthly basis, the transport index rose jumped 4.5% (October: 3.1%) its steepest rate in twenty months and one of the main contributors to the higher headline inflation in November. A 15 sen increase in the unleaded and diesel fuel prices is the main reason behind the elevated transportation cost in November.

The Alcoholic Beverages & Tobacco index edged up 1.9% YoY in November after thirteen months of double-digit growth. This can be attributed to the fading low base effect from the tobacco excise tax increase in November of last year.

The world’s major economies mostly experienced stronger inflation in November, reinforcing the case for less monetary easing by their central banks. Inflation in Eurozone and U.S. recorded a more than two-year high increase of 0.6% YoY and 1.7% YoY respectively in November. China inflation also accelerated for the third successive month to 2.3% YoY in November. Regionally, Indonesia and Thailand registered a seven-month and 23-month high increase of 3.6% YoY and 0.6% respectively.

Outlook

Heightened 4Q16 inflation. In consideration of the effect of cooking oil subsidy rationalization in November, disrupted food supply due to the monsoon season, weaker ringgit and year end festivities, we see elevated inflationary pressure to largely affect the Food & Beverages category, lifting headline inflation in December. However, a decrease in fuel price in December (5 sen cut in the unleaded and diesel price) could partly offset the inflationary pressure and keep the headline inflation in check. We thus project the average CPI growth to be higher at 1.7% YoY in 4Q16, bringing its full-year growth within our forecast of 2.1% YoY.

Improved economic prospects to fuel 2017 Inflation. We believe inflation will likely gain momentum and stay higher next year, partly in view of ongoing government subsidy rationalization plan, brighter prospect for crude oil price recovery and an expected improvement in domestic demand in 2017. Hence, we maintain our 2017 full-year inflation at 2.3%.

Policy rate likely to stay pat in 2017. With the increasing expectations of more than one rate hike by the U.S. Federal Reserve next year, continued large outflow of capital and the persistently weak ringgit, we expect it would give BNM more reason to leave interest rates unchanged next year. Nevertheless we reiterate our view that the current stable inflation will provide room for BNM to ease the monetary policy if needed. 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 - 22 Dec 2016