OVERVIEW

• April’s headline inflation rose to 1.4% YoY from 1.3% in March and sharply lower compared to 4.3% in the same month a year ago. The consumer price index (CPI) was lower than Bloomberg market consensus and house estimate of 1.6% YoY. The index remained unchanged on a monthly basis. Meanwhile, core inflation (excluding food) expanded to 1.5% YoY. We believe that the lower-than-expected CPI was driven by stable fuel prices and a higher base a year ago.
• Inflation seen across all sub-indices except communication (-0.7% YoY), and clothing and footwear (- 0.8 YoY). The index of restaurant and hotel, as well as health expanded to 2.2% YoY (Mar: 2.0%) and 2.1% YoY (Mar: 2.0%) respectively. While the index for housing, water, electricity, gas, and fuel remained unchanged, the transport index rebounded to 0.4% YoY (Mar: -1.5%).
• The index of food and non-alcoholic beverages moderated to 2.6% YoY, an 18-month low, from 2.8% in March. This could be driven by unchanged in domestic fuel price and the appreciation of the Ringgit which help lower the price of imported food. We expect the Ringgit to remain relatively stable despite the post election uncertainty supported by higher global oil price due to tensions in Iran and OPEC supply disruptions.
• We expect inflation to moderate further in 2Q18 as the economy slows and the stable retail fuel prices which have been capped at RM2.20/litre and RM2.47/litre respectively for RON95 and RON97 since 22 March 2018 despite higher crude oil prices. The new government’s pledge to zero rate the GST from 6.0% which takes into effect on 1 June would also help to pin down cost push inflation. Hence, we are revising our full year CPI growth forecast to 2.3% from 2.8%.
• Bank Negara Malaysia (BNM) left its key interest rate unchanged at its last Monetary Policy Committee meeting on May 10, generally implying a slower inflation rate and moderating growth trend (1Q18: 5.4% Vs. 4Q17: 5.9%) as reasons. Our reason for BNM to retain the overnight policy rate at 3.25% till end of the year are similar with post election uncertainty and external factors thrown in to strengthen our case for policy status quo.

Source: Kenanga Research - 24 May 2018