OVERVIEW

● Malaysia’s headline inflation grew by 0.3% YoY in September a tad higher than August’s 0.2%. It was lower than our house estimate of 0.6% while the consensus median was expecting a much higher 0.8% increase. On MoM basis, the index rose by 0.4% compared to 0.2% in August. The index grew at a slower pace of 0.5% in 3Q18 compared to 1.3% in 2Q18. Meanwhile, core inflation rebounded by 0.3% YoY after it fell by 0.2% in two consecutive months in July and August. The inflation growth trend has remained subdued since the abolishment of the Goods & Services Tax (GST) in June. Meanwhile, the Sales & Service Tax (SST), GST’s replacement, seemed to only have a marginal impact on prices in September. Nonetheless, the relatively lower inflation rate may partly due to the high base effect while the fuel subsidies may have softened the input cost impact.

● The growth of the CPI was driven by the index of transport, housing, water, electricity, gas, & other fuels as well as food & non-alcoholic beverages. The transport index rose by 0.3% YoY (August: +2.1%) the slowest in six months due to the higher base a year ago. The weighted average retail fuel prices for RON95 and RON97 were higher at RM2.2000/litre and RM2.6500/litre respectively compared to RM2.1880/litre and RM2.4817/litre respectively a year ago. On monthly basis, the index grew by 0.3% (August: +0.1%). Additionally. the index of housing, water, electricity, gas & other fuels increased by 2.1% YoY (August: +2.0%), while index of food & non-alcoholic beverages rose by 0.5% YoY (August: +0.4%).

● The communication index declined by 1.6% YoY (August: -4.0%). However, it rose by 2.3% MoM (August: -0.1%) due to the impact of SST after the tax holiday period ended in August. 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 increased by 2.1% YoY in September (August: +2.0%) driven by higher food and energy prices. Meanwhile, inflation in the US moderated to 2.3% YoY from August’s 2.7%. Although inflation moderated in September, we expect the Fed may continue to raise interest rates at its December policy meeting unless the current financial market rout worsens.

● The implementation of the Sales and Services Tax (SST) in September may have a minor impact on cost push inflation as the cost pressure have been mitigated by fuel subsidies and we expect the inflation to remain subdued by year end. Year-to-date, the CPI YoY growth rate has moderate to 1.2% compared to 3.9% in the same period a year ago. 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% this year to support domestic economic growth.

Source: Kenanga Research - 29 Oct 2018