OVERVIEW

• Inflation moderates further into 4Q17. November’s consumer price index (CPI) extended along previous month’s moderation path, registering a softer growth of 3.4% YoY (Oct: 3.7%), slowing for the second month from September’s five month high of 4.3%. Core inflation similarly moderated further to 2.2% (Oct: 2.3%).
• Higher base effect moderates food prices. Food prices moderated to a 10-month low of 4.0%, from October’s 4.4% as a result of higher base effect from last November’s introduction of the Cooking Oil Price Stabilisation Scheme (COSS). The moderation in cooking oil prices balanced out the rise in food prices from the monsoon season.
• Transportation index extends moderation. Despite an increase in fuel prices at the pump in November, the transportation index YoY growth slowed for the second month to 10.8% from 12.1% in October and 15.8% in September, suggesting a dissipation of the rising oil price effect.
• Easing 4Q17 inflation seen. Moving into December, we expect headline CPI to exceed 4.0% YoY growth due to the base effect, bringing the average growth in 4Q17 to around 3.6% YoY, the slowest quarterly growth for the year. Hence, we maintain our full year forecast at 3.9-4.0% (2016: 2.1%).
• Stronger narrative for OPR hike. Beyond 4Q17, factors driving growth, coupled with further tightening from the Fed lays a stronger narrative for Bank Negara Malaysia (BNM) to raise interest rates. Ensuring stability in the financial market and the ringgit would further support the case for a rate hike in the upcoming Monetary Policy Committee (MPC) meeting in January.

November’s inflation moderates further into 4Q17. The second month of 4Q17 saw further moderation of its consumer price index (CPI), registering a growth in prices of 3.4% YoY, extending the moderation following October’s 3.7%. November’s inflation rate was in line with the median consensus estimate of 3.4% but lower than the house estimate of 3.6%. On a MoM basis, the CPI rose by 0.7% (Oct: -0.2%). Post seasonal adjustment, the CPI rose by 0.7% from previous month.

Core inflation moderates further. Core inflation similarly experienced the slowest rise for the year, at 2.2% YoY (Oct: 2.3%), suggesting that the volatile and transitory elements of rising fuel prices are dissipating.

Higher base effect moderates food prices. Food inflation moderated further to a 10-month low of 4.0% YoY (Oct: 4.4%). The moderation was due to the higher base effect from last November’s introduction of the Cooking Oil Price Stabilisation Scheme (COSS), which increased the cooking oil prices during the same period last year. The oil and fats sub-index grew at a moderate pace of 1.54% YoY (Oct: 16.24%). The slower rise in food prices is also in line with the milder inflation in global prices. The Food and Agriculture Index (FAO) registered a milder inflation of 2.3% from October’s 2.5%. On a MoM basis, the food prices rebounded by 0.4% after it fell by 0.5% in October, possibly due to the year-end monsoon season where prices were reported to have soared as a result of fish and vegetables supplies shortage. The November seafood sub-index increased by 0.47% MoM (Oct: - 0.93%) while vegetables sub-index increased by 2.2% MoM (Oct: -0.46%).

Transportation index extends moderation. In spite of the increase in Brent crude oil prices, the transportation index registered a lower double-digit growth, leaning on the lower end of the 8.0-13.0% range forecasted. This suggests a fading low base effect of oil prices, resulting in a gradual dissipation of the effect of the rising oil prices on the transportation index. The index registered a growth of 10.8% during the month, from 12.1% in October and 15.8% in September. On a MoM basis, it saw a 3.3% increase, from the 0.2% decline in October. This increase is consistent with the increase in pump prices compared to the previous month. The November weighted average retail prices for RON95, RON97 and diesel increased to RM2.3037/litre, RM2.5913/litre and RM2.2110/litre respectively (Oct: RM2.1768/litre, RM2.4768/litre and RM2.1265/litre respectively). Retail prices for RON95 and RON97 rose throughout the first three weeks of November, albeit decreasing by eight sen during the last week of the month. While Brent crude oil price growth slowed to 26.0% (Oct: 27.1%), the Malaysian Tapis oil price expanded by 29.2% in November (Oct: 26.1%).

Broad-based moderation of prices. Almost all the indexes experienced moderation in prices, except for the recreation services and culture, as well as restaurant and hotel index, typically due to the seasonal year-end holiday spending. The restaurant and hotel sub-index increased by 2.8% YoY (Oct: 2.7%) while recreation services and culture increased by 0.6% from 0.4% registered in October.

Global monetary condition to remain supportive of growth. The US Fed’s decision for a 25 basis points rate hike last week have yet to trigger a similar tightening from the other major economies. Inflation across major economies remains benign and supportive of growth. The ECB kept its rates unchanged and continue to suggest for continuous loose policy moving ahead. Aside from China, which raised its key policy rate following the Fed rate hike, all major economies retained their loose policies, suggesting looser monetary condition to remain. Eurozone’s inflation edged slightly higher at 1.5% in November (Oct: 1.4%), US inflation rose in line with growth of the economy by 2.2% (Oct: 2.0%) while China’s inflation declined to 1.7% following 1.9% inflation registered in Oct 2017.

OUTLOOK

4Q17 prices seen easing. During the month of December, pump oil prices begin to moderate, steering away from the the trajectory of higher global crude oil prices. The weighted average prices of retail prices for RON95, RON87 and diesel up to 27 Dec stood at RM2.2767/litre, RM 2.5515/litre and RM2.2215/litre respectively (Nov: RM2.3037/litre, RM2.5913/litre and RM2.2110/litre respectively), disengaging from the growth in Brent prices (RM63.80/barrel on Dec 20). While retaining our global oil forecast at the upper end of the USD47-52/barrel range, we do not expect future rise in global oil prices to reflect significantly on December pump prices. We

also expect the pump price increase announced by the government yesterday (RON95: two cents; RON97: two cents; Diesel: three cents) to balance off with the decrease in prices during the first two weeks of the month. We therefore expect a muted transportation index as well as headline prices in December, similar to November figures. Along with the moderation of headline prices in the first two months of 4Q17, we foresee the CPI growth to moderate to 3.6% YoY (3Q17:3.8%).

Growth trajectory to lead prices. Beyond 4Q17, progressive developments from the domestic and external front are suggesting a potentially strong domestic demand and consumption growth to continue well into the 1H18. Just yesterday, the much awaited US tax bill rewrite has been approved by the House Republicans. The bill, which would see marginal corporate tax rate declining to 21% from 35%, is expected to spur economic activities and therefore encourage export growth from Asia, in particular Malaysia. Along with the stronger growth indicators and loose monetary conditions seen in the European economies and regional trading partners, we expect strong external demand to lead price growth. On the domestic front, we expect demand to strengthen further in view of the rise in discretionary and planned fiscal spending as the 14th General Election inches closer. Additional developments including the rise in minimal wage, potential reduction of electricity tarriff (from declining coal prices) as well as muted pump oil prices is expected to result in higher disposable income and therefore private consumption.

Stronger narrative for OPR hike. We therefore expect this growth-led price increase to be among a key factor steering Bank Negara Malaysia’s next monetary policy stance. Additionaly, a moderate expansion of the US economy, backed by strong labour market conditions and expected pickup in inflation is boosting forecasts for the US economy, signalling the potential for Fed to realise the three further rate hike it signalled for 2018. This writes for a stronger narrative for BNM to push ahead for an OPR hike in order to minimise the risk off factor that would likley pull investments away from Malaysia. While the ringgit has remained resilient despite the Federal Reserve raising its interest rates by 25 basis points following its December FOMC meeting, we do not discount the possibility that the ringgit would face headwinds and may undergo some degree of depreciation pressure in the short term. To cushion the impact of these rate hikes, along with sustained growth momentum and solid fundamentals of the domestic economy, we expect BNM to follow suit with a rate hike by 25 basis points in 2018. While we expect the USDMYR pair to fluctuate between 4.05- 4.15, we maintain our year-end target of 4.15.

Source: Kenanga Research - 21 Dec 2017