Malaysia Core inflation improved to 3.1% yoy despite higher transport costs
Malaysia’s headline inflation rate, as measured by consumer price index (CPI), slowed further to 3.2% yoy in May, after holding at a high of 3.5% for two straight months from February-March 2014 (3.4% in April). This was in line with market expectations. Food prices, which account for 30.3% of the total CPI basket, slowed significantly from 3.6% yoy in April to 3.3% in May, due to improvements in prices of vegetables, biscuits & cereals, as well as fish & seafood.
Core inflation, excluding food prices, also improved from 3.3% yoy in April to 3.1% in May, due mainly to declines in prices of clothing & footwear and cost of communication. However, costs of transport rose from 5.3% yoy in April to 5.5% in May, and may likely continue to trend higher if the Government resume its subsidy rationalisation programme by raising the country’s domestic fuel prices.Some market observers believe that there is a possibility Government may ithdraw subsidies for fuel prices further in 3Q14.
However, we expect any adjustment to the Government’s control retail petrol prices (RON95 & diesel) will likely to be gradual despite recent rise in global oil prices due to the Iraq crisis. The International Trade and Industry Minister Datuk Seri Mustapa Mohamed, was recently quoted by the press, saying that related government agencies would continue to monitor price rises and keep the country’s inflation under control to ease the people's burden. We expect food prices to rise slightly in 3Q14 due to the Hari Raya festivity, but the magnitude of price increases will be manageable, as some essential food items are being controlled during festive seasons.
On a month-to-month comparison, the headline inflation increased from a flat rate in April to 0.1% mom in May, attributed to the 0.5% rise in housing & utilities cost. On a cumulative basis, inflation rate increased by an average of 3.4% yoy in January-May 2014, significantly higher than 1.6% in the same period of the previous year. In the months ahead, given the expectation of subsidy rationalisation, we maintain our forecast of inflation rate averaging around 3.5-4.0% in 2014 (2.1% in 2013), at the upper end of the official government’sforecast range of between 3.0-4.0%.
Fig 1: Consumer price index (CPI), May 2014 (click to enlarge)
On the monetary policy front, despite economic activities improving on the back of domestic demand and exports, we expect the stance of monetary policy to remain accommodative, where Bank Negara Malaysia (BNM) is likely to maintain its overnight policy rate (OPR) at 3% in the next MPC meeting on 10 July 2014. However, with BNM cautioning that “the current monetary and financial conditions could lead to a broader build up in economic and financial imbalances,” in reference to the currently adopted accommodative monetary policy with prolonged low interest rate conditions, we believe some normalisation of overnight policy rate (OPR) in late 2H2014, where the policy rate could rise by 25bps from the current 3.0% to 3.25% in the BNM MPC meeting on 18 September 2014.
by Affin Bank
