OVERVIEW

• March’s inflation receded for the third month to a 20-month low of 1.3% YoY (Feb: 1.4%). The month’s inflation was below Bloomberg market consensus and house estimate of 1.6% and 1.8% respectively. Similarly, core inflation moderated to 1.7% YoY (Feb: 1.8%). Compared to the previous month, inflation declined by 0.3%. The month’s lower inflation affirms our expectations for a moderating 1Q18 inflation trend which slowed to 1.8% YoY (4Q17: 3.6%).
• The slowdown in inflation was broad-based across all the indices. Transportation index led the way, reaching a 16- month low as it declined for the second month to -1.5% (Feb: -0.3%). The decline in transportation index was mainly due to lower retail fuel prices during the month. Weighted average retail prices for RON95 and RON97 were lower at RM2.1977/litre and RM2.4655/litre respectively in March (Feb: RM2.2600/litre and RM2.5300/litre respectively). The month’s lower retail prices differed with growth in Brent crude prices which trended higher at 33.0% YoY (Feb: 18.3%). 
• Lower food prices also contributed to the month’s headline inflation. The food and non-alcoholic beverages index moderated to 2.8% YoY, a 17-month low despite last year’s lower base effect. The month’s lower food prices could be attributed to the appreciation of the Ringgit and subsequently lower price of imported food. We expect the Ringgit to sustain in its current strength following an appreciation by about 5.8% against the USD in the first three months of the year (based on the average 1Q18 vs 4Q17).
• Inflation is likely to creep up in 2Q18 following a reversal of the preceding year’s higher base effect. Nonetheless, we expect overall inflation to remain moderate in April due to the lower retail fuel prices which have been capped in the first two weeks of the month at RM2.20/litre and RM2.47/litre respectively for RON95 and RON97. For 2Q18, we are expecting inflation to creep up slightly to 2.9%. We retain our full year inflation forecast at 2.8% YoY (2017: 3.7%).
• We expect further rate hikes to be off the cards during the next Monetary Policy Committee meeting on 10 May 2018. Following the slower inflation real interest rate has widened to +199 basis points. As inflation is seen moderating through 2018, the main concern of the central bank would be to accommodate growth, which is expected to moderate on the back of lower external demand. We are expecting growth to moderate to 5.5% in 2018 (2017: 5.9%). We are also seeing little risk of financial imbalances as capital flows remains encouraging at this point of time. Hence, we expect BNM to retain the OPR at 3.25% for 2018.

Source: Kenanga Research - 19 Apr 2018