● The headline inflation cooled to 3.7% YoY in January, matching house estimate and market expectation

- The primary factors for the moderation were a significant deceleration in the cost of communication services and the decrease in Brent crude oil price, which resulted in lower transportation cost.

- On a monthly basis, CPI increased at an unchanged rate of 0.2% MoM despite higher food (0.6% MoM; Dec: 0.5%) prices and a rebound in recreation services & culture (1.1% MoM; Dec: -0.9%) cost, while core inflation continued to moderate to its lowest level in five months at 3.9% YoY (Dec: 4.1%).

● The rise in inflation was primarily due to the YoY moderation in transport, restaurant & hotel and food components

- Transport (4.0%; Dec: 4.9%): continue to edged lower, hitting an eight-month low, on a moderation in the cost of fuels and lubricating equipment (0.9%; Dec: 1.8%) and a decline in rail transport price (-0.6%; Dec: 0.0%).

- Restaurant & hotel (6.8%; Dec: 7.4%): despite China’s reopening, the component decreased to a five-month low, due to a reduction in both restaurant & cafes (6.9%; Dec: 7.5%) and accommodation services costs (6.0%; Dec: 6.9%).

- Food & non-alcoholic beverages (6.7%; Dec: 6.8%): trend marginally lower to a seven-month low, mainly due high base effect. To note, prices of food at home reverse to an increase of 5.1% YoY (Dec: 4.9%) due to a higher MoM increase in processed meat and fresh seafood prices.

● Softening inflationary pressure across advanced and developing economies, but central banks may continue to hike

- US (6.4%; Dec: 6.5%): fell to its lowest level since October 2021, indicating that price pressure is easing. Nevertheless, inflation climbed 0.5% MoM (Dec: 0.1%), mainly due to higher energy and food prices, supporting further Fed rate hikes.

- EU (8.5%; Dec: 9.2%): decelerate for the third straight month due to a moderation in energy costs (17.2%; Dec: 25.5%). However, the ECB may continue to remain hawkish as core inflation remained elevated at 5.2% (Dec: 5.2%).

- Thailand (5.0%; Dec: 5.9%): cooled to a nine-month low due to lower food and energy prices. However, it is still far above BoT’s target range of 1.0 - 3.0%, suggesting that the central bank may raise the policy rate by another 25 bps to 1.75%.

● 2023 headline inflation forecast maintained at 2.5% (2022: 3.3%), but upside pressure to price remains

- There are indications that inflation may continue to trend lower in the coming months, primarily driven by improvements in global supply-chain efficiency and a slowdown in global demand. However, there are still potential risks that could push inflation up, such as higher tourism-pull factor and elevated geopolitical uncertainty. This, coupled with a potential implementation of targeted subsidies by the government in 2H23 could also contribute to inflationary pressures.

- We reckon that the BNM has reached the end point of its policy normalisation cycle and is expected to keep the overnight policy rate (OPR) unchanged at its upcoming monetary policy meeting in March. This is mainly due to signs of cooling inflation and the ongoing global economic slowdown. However, any further decisions will be based on the macroeconomics trend and the government’s fiscal policy. It is likely that the central bank will maintain the OPR at 2.75% until end-2023, but any changes in economic conditions in the coming months could prompt BNM to re-consider rate adjustments.

Source: Kenanga Research - 27 Feb 2023