OVERVIEW

● Headline inflation held steady at 0.2% YoY in December 2018 (Nov: +0.2%), below both consensus and house estimates of 0.4% respectively. On MoM basis, the index grew by 0.1%, a five-month low. Meanwhile, the core inflation grew at a slower rate of 0.4% YoY (Nov: 0.5%). For 2018, the CPI moderated to 1.0%, the lower end of house forecast range of 1.0-1.5%, from 3.8% in 2017. The inflation growth trend has remained benign since August, 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 year-end festive holidays, school break and the monsoon season were factors holding up inflation. Food & non-alcoholic beverages increased by 0.7% YoY (Nov: +1.1%) while prices of alcoholic beverages & tobacco rose 1.1% YoY (Nov: +1.0%) due to the Control of Tobacco Product Regulations 2004, which require all prices of tobacco products to be increased following the implementation of the Sales & Services Tax (SST). Similarly, the restaurants & hotels index rose 1.3% YoY (Nov: +1.2%). Additionally, the higher base effect of mainly in the index of transport and communication had also influenced the overall CPI moderate growth trend. The official pegging of RON95 at RM2.20 per litre despite higher Brent crude oil prices which averaged USD71.6/bbl in 2018 (2017: USD55.7/bbl) dragged down the transport index which contracted by 2.0% YoY (Nov: -2.3%). Meanwhile, the Mandatory Standard on Access Pricing (MSAP) requirement continue to exert a downward pressure on the price of broadband services with the communication index continue to fall by 1.3% YoY in December.

● Volatile energy prices weighing down on inflation of advanced and developing economies. US inflation slowed to 1.9% in December (Nov: +2.2%) largely due to a decline in gasoline and fuel cost (-3.5% YoY). However, core inflation edged higher by 0.2% YoY in December and averaged at 2.2% in 2018 which remained above Fed’s 2.0% inflation target partly supporting its decision to hike interest rate at last December FOMC meeting. Meanwhile, headline inflation in the Eurozone moderated to 1.6% (Nov: +1.9%) an eight-month low while core inflation remained at 1.0%. A softer inflation was observed in most developing countries including China, India, Indonesia and Thailand thanks largely to a fall in energy prices. As a reference, average Brent crude oil price fell by 12.7% to USD56.6/bbl in December versus USD64.8/bbl in the preceding month.

● For 2019, the new mechanism of floating of domestic fuel prices in 2Q19, albeit to be implemented gradually, and low base effect arising from the tax holiday period from June to August 2018 may technically lift up YoY inflation in the 2H19 but we expect it would be limited as prospects of a cooling global growth, a slower domestic economy, ongoing trade tensions and lower crude oil prices would limit inflation growth. Hence, due to the uncertainties, we maintain our 2019 CPI forecast within a range of 1.0-1.5%. Given the same arguments we expect Bank Negara Malaysia to hold the overnight policy rate steady at 3.25% this year’. We also believe that it has room to cut interest rates if the economy deteriorates sharply but the probability remains low at this juncture.

Source: Kenanga Research - 25 Jan 2019