OVERVIEW

● The headline inflation slowed to 0.2% YoY in August (July: +0.9%), its lowest since February 2015. It was a tad lower than our estimate of 0.3% while the consensus median was expecting 0.4%. Similar to July the index edge up to 0.2% MoM. The inflation growth trend has remained subdued since the abolishment of the Goods & Services Tax (GST) and the reintroduction of fuel subsidy from June onwards. Meanwhile core inflation declined by 0.2% YoY similar to the previous month.

● Nonetheless, the YoY growth in CPI was mainly driven by the index of transport, as well as housing, water, electricity, gas & other fuels. The transport index rose by 2.1% YoY (July: +6.7%). This was largely because the weighted average retail fuel prices for RON95 and RON97 were higher at RM2.2000/litre and RM2.6377/litre respectively compared to RM2.1177/litre and RM2.3868/litre respectively a year ago. On monthly basis, the index grew marginally by 0.1% (July: +0.0%). Meanwhile, the index of housing, water, electricity, gas & other fuels was up by 2.0% YoY similar to the preceding month.

● As expected the communication index continue its downtrend, declining by 4.0% YoY (July: -3.9%). It fell by 0.1% MoM (July: 0.0%). We expect the decline to continue in 2H18 following the government’s commitment to fulfil its election promise to reduce the cost of living and raise the nation’s internet connectivity and speed. 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.

● Mix global inflation trend. Headline inflation in Eurozone moderated to 2.0% YoY (July: +2.1%) which is largely why it is delaying the European Central Bank to dial down its QE. Meanwhile, inflation in the US slowed to 2.7% (July: +2.9%). Despite the month's moderation in price, inflation pressures in the US are steadily building up on the core level, driven by a tightening labour market and robust economic growth, reaffirming the rate hike signal by the Fed.

● We expect inflation to gradually rise after the implementation of the Sales and Services Tax (SST) in September along with the impact of a weaker ringgit which could result in higher input cost. However, the impact would be partly mitigated by fuel subsidies. Year-to-date, the CPI YoY growth rate has moderate to 1.3% compared to 3.8% 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%) and expect BNM to keep its policy rate 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 - 20 Sept 2018