Overview

• Consumer price index grows 1.8% YoY. Consumer price inflation rose 1.8% YoY in December repeating November’s growth. It fell below consensus estimates of 1.9% but slightly exceeding the house target of 1.7% YoY. On a MoM basis, inflation was lower at 0.0% from 1.0% in November. Overall, full-year consumer inflation matched our house estimates of 2.1% for 2016.
• Food prices the main driver of inflation. By category, Food & Non-Alcoholic Beverages receded slightly to 3.7% YoY from 3.8% in November though still being the main driver of inflation. Meanwhile, Transport index declined by a smaller - 0.6% YoY (Oct: -1.5%) as fuel prices fell marginally during December.
• OPR likely maintained. We believe that BNM is unlikely to raise the OPR this Thursday as it digests further information on both the domestic and global front. Domestically, factors on our radar include any material threat to Malaysia’s growth trajectory and possible acceleration in inflation moving in 2017. Internationally, we are casting our net wide in evaluating a multitude of factors including the potential fallout from initial policy indication from US President Donald Trump postinauguration and Theresa May’s “hard Brexit”.

Flat growth in consumer price index. The consumer price Index (CPI) increased 1.8% YoY in December, unchanged from November, below consensus estimate of 1.9% but slightly above the house expectation of 1.7% YoY. CPI growth was sustained by continued increases in food prices, though this was tempered by the slight fall in the “transport” sub-component. Furthermore, the higher base rate impact from the 40% increase in November 2015’s cigarette tax has been mitigated since the previous month, resulting in a more subdued inflation for December. On a monthly basis, the CPI remained unchanged after a 1.0% record high MoM increase in November. This brings the 2016 full year inflation at 2.1%, matching our whole year estimate and similar to the 2.1% full year inflation for 2015.

Food prices elevated. Food prices continue to be the key driver of inflation in December. The food and non-alcoholic beverages sub-index (30.2% of CPI) rose 3.7%, just slightly lower than 3.8% in November. On a month-on-month basis, the food and nonalcoholic beverages sub-index advanced 0.6% from 1.0% in November. We continue to observe the impact from the dismantling of cooking oil subsidies as the sub-index for cooking oil shot up 45.9% during the month – the increase also coincided with higher global palm and soybean oil prices. Furthermore, disruptions to food production (particularly for fisheries) and food distribution from the monsoon season have fed into inflation, translating into higher prices for especially for fishery produces and a modest increase in vegetable prices.

Housing, water, electricity, gas and other fuels static. Inflation in the Housing, Water, Electricity, Gas & Other Fuels subindex (23.8% share of CPI) remained unchanged at 2.1% YoY for the fifth consecutive month. On a monthly basis, the index was static compared to the mild 0.5% MoM increase in November.

Transportation sub-index subdued. The transportation sub-index retreated by a lower 0.6% YoY (-1.5% YoY in November), likely from the 5 sen decrease in petrol and diesel prices during December. A more subdued YoY decline in December relative to November belies the -1.4% MoM decline (+4.5% MoM in November) as the high base rate effect in November dissipates. However, overall, the transportation sub-index is showing signs of a reversal with the sub-index falling by smaller percentages since August; the sub-index fell by 9.9% in July.

Impact of sin tax dissipating. The Alcoholic Beverages & Tobacco index edged up by just 0.1% YoY (1.9% YoY in November) as the impact from the sharp increase of November 2015’s cigarette excise have run its course, eliminating the low base effect. Prior to November, inflation in this sub-index hit double-digit levels following the back-to-back introduction of sin taxes since late 2013.

Mixed bag of global inflation results. After a stronger November inflation reading, there has been a divergence of sorts for inflation rates. Inflation has picked up significantly in the Eurozone, rising to a 39-month high of 1.1%, inflation in China and Indonesia were more subdued, reversing its accelerating pace in November.

Outlook

Inflation trudges on. With upward pressures from food supply disruption, weaker ringgit, various subsidy rationalisation and the gradual ascent of oil prices, we expect inflationary pressure to creep up in the food and non-alcoholic beverages along with the transportation sub-indices, lifting up overall inflation in January. Furthermore, increase in fuel prices (RM0.20/litre increase for RON95, diesel and Euro 5 Diesel and RM0.15/litre increase for RON97) will likely result in elevated inflation levels in January.

Recovering economy to spur inflation. As Malaysia continues its cyclical recovery, we believe that inflation will gradually gather momentum. This is further supported by likely recovery, or at least stabilisation, of oil prices. Assuming modest successes in oil price recovery to USD55/barrel with an upside of USD58/barrel, we expect the transportation subindex to reverse its contraction as early as January, fuelling inflation in 2017. However, given relatively higher base rate effect in 1Q16, inflationary pressure will initially be moderate before picking up pace in March. We thus project a 2.2% CPI growth rate for 1Q17 before rounding off 2017 with an elevated 2.5% CPI inflation, an upward revision to our earlier forecast of 2.3%.

OPR to remain at 3.00%. At the very least, we believe that BNM is highly unlikely to cut interest rates in its first Monetary Policy Committee meeting of 2017 (scheduled to conclude Thursday, 19 January 2017). Uncertainties from the inauguration of US President Donald Trump (on Friday) and his policy directions, the dynamics of Theresa May’s “hard Brexit”, among others, imply that the MPC are more likely to adopt a more cautious view on monetary policy, at least until further information emerges. Beyond the January MPC meeting, we believe that there is no immediate threat to the growth trajectory that justifies a cut to the OPR. While we reiterate our view that prevailing inflation rates remain manageable, with room for BNM to ease monetary policy, tentatively, we believe that BNM is less likely to cut rates in view of expectations for more aggressive rate hikes by the US Federal Reserves in 2017, continued outflow of capital and the relative weakness in exchange rates.

Source: Kenanga Research - 19 Jan 2017