OVERVIEW

● The headline inflation edged up to 0.9% YoY in July from June’s 0.8% meeting Bloomberg’s and Reuters’ median consensus forecast but slightly lower than house estimate of 1.0%. It was up by 0.2% MoM. The consumer price index relatively weak growth pace is expected following the abolishment of Goods & Services Tax (GST) and the reimplementation of fuel subsidy. Meanwhile, core inflation declined by 0.2% YoY from +0.1% YoY in June.

● The month’s inflation was driven mainly by transport prices. The transport index rose 6.7% YoY (June: +5.5%) due to lower base recorded in the preceding year. Weighted average retail fuel prices for RON95 and RON97 were higher at RM2.2000/litre and RM2.5597/litre respectively against price of one year ago at RM1.9577/litre and RM2.2116/litre respectively. On monthly basis, the index remained unchanged. Similarly, housing, water, electricity, gas & other fuels growth grew 2.0% YoY (June: +1.5%).

● Communication index continue its sharp fall of 3.9% 
YoY (June: -3.9%) for two consecutive months. We expect the price decline to continue in 2H18 following the new government’s commitment to fulfil its election promise to reduce the cost of living and raise the nation’s internet connectivity. The price of broadband services is expected to drop by at least 25.0% by year end in line with the Mandatory Standard on Access Pricing (MSAP) requirement on GLCs from June 8.

● Meanwhile, due to a higher base a year ago food prices eased to 0.7% YoY (June: +0.8%), the lowest since October 2009. On monthly basis, it rebounded by 0.2% MoM (June: -1.0%), largely due to the weak ringgit resulting in higher import bill on food.

● Global inflation on the rise. Headline inflation in Eurozone increased to 2.1% YoY (June: +2.0%). The month's inflation was off from the European Central Bank's target rate of 2.0% and the reading marked the highest inflation since December 2012. Meanwhile, inflation in the US remained at 2.9% (June: +2.9%), putting more pressure on the US Fed to further raise its interest rate at its next policy meeting in September after two rate hikes in March and June.

● We expect inflation to only gradually pick up pace in 3Q18 following the impact of a weaker ringgit and the end of tax holiday and the reintroduction of Sales and Services Tax (SST) in September. This, however, would be mitigated by the growth slowdown and the reintroduction of fuel subsidies. Year-to-date, the CPI growth rate has moderated to 1.5% compared to 3.9% in the same period of last year. Hence, we maintain our CPI growth forecast of 1.0-1.5% for this year (2017: 3.7%). We believe there is room for BNM to keep its interest rates on hold at 3.25% in the interest of supporting domestic demand as external factors are expected to weigh on Malaysia’s economic growth.

Source: Kenanga Research - 27 Aug 2018