OVERVIEW

● Malaysia’s headline inflation rose at a marginally faster pace of 0.6% YoY in October (Sep: 0.3%). While it was in line with the consensus estimate, the figure came below house estimate of 0.9%. On MoM basis, the index grew by 0.2% (Sep: +0.4%). Meanwhile, the core inflation expanded to 0.4% YoY from September’s 0.3%. The inflation growth trend has remained subdued since June, in part due to the tax holiday period following the abolishment of the Goods & Services Tax (GST), the reintroduction of the fuel subsidy and the high base effect. The impact emanating from the reimplementation of the Sales & Services Tax (SST) from September remained muted, thus far.

● The higher CPI was underpinned by the rise in housing, food and non-alcoholic beverages, restaurant, education and transport indices. Largest increase in CPI growth, relative to the previous month, was recorded by the food and non-alcoholic beverages, rising as much as 77 basis points to 1.2% YoY, its highest since June. The advent of monsoon season was the main reason disrupting food supply as reflected in the food sub-group index of vegetables (3.0% YoY; Sep: -1.2%) and fish and seafood (0.8% YoY; Sep: 0.4%). We expect upward pressure on the food sub-group indices to remain for the next two months.

● Sustained inflation in the advanced and regional economies. In the US, inflation edged higher to 2.5% (Oct: 2.3%), further strengthening our expectations of a rate hike by the Fed at its December policy meeting. Headline inflation in Eurozone edged up to 2.2% (Sep: 2.1%), marking the highest growth since December 2012, underpinned by rising energy prices. Japan recorded an unchanged core inflation of 1.0%, with the prospect of weaker prices amid upcoming cuts in mobile phone charges and tapering support from energy cost. Similarly, China’s inflation was sustained at 2.5%, remaining below the PBOC’s target of 3.0%.

● In the remaining months of 2018, we expect inflation to taper off and remain below 1.0% as the upward pressure arising from weak MYR and seasonal monsoon period will be partially offset by fuel subsidies, particularly the continued fixation of RON95 price at RM2.20, and high base effect from the previous year. On a year-to-date basis, the CPI has moderated to 1.1% compared to 3.9% in the same period a year ago. As such, we expect the whole year CPI growth to likely hit the lower end of our forecast range of 1.0-1.5% (2017: 3.7%). For 2019, floating of domestic fuel prices in 2Q19 and low base effect arising from the tax holiday period in June to August 2018 may exert upward pressure to inflation. However, an expected slower global growth and possibly lower crude oil prices would put a cap on inflation upside. Hence, CPI is projected to only increase, albeit slightly, within a range of 1.0-1.5% in 2019.

● Given the potentially subdued inflationary trend coupled with the expectation of moderating global trade and growth,

we expect Bank Negara Malaysia to hold the overnight policy rate steady at 3.25%. Despite that regional central banks, namely Indonesia and the Philippines have raised interest rates and Thailand has leaned towards tightening, we believe BNM will continue its accommodative monetary policy stance and ensure the OPR level remains supportive of growth.

Source: Kenanga Research - 26 Nov 2018