Economic Update - Inflation remains subdued, as expected

- Malaysia’s inflation rate eased further, falling to 1.7% YoY in May (April: 1.9% YoY), the lowest since June 2010. This reinforces our belief that inflation levels will likely remain subdued this year.

- The slower rate of price increase was in line with both our house estimate and market’s expectations (Bloomberg Poll).

- On a MoM basis, however, after remaining unchanged in the previous 3 months, inflation rose by 0.2%.

- The largest factor that contributed to the slower YoY rise in inflation was the declining growth seen in the Non-Food items as prices in this index rose at a slower rate of 1.2% YoY (April: +1.7%).

- Among them, the transport category eased significantly to 0.4% YoY (April: +1.0%), potentially signaling the ebbing effect of the cuts in petrol subsidy last year. The rise in the Housing, Water, Electricity, Gas & Other Fuels subsector also remained subdued at +1.6% YoY in May (April: +1.8%).

- However, prices in the Food & Non-Alcoholic Beverages index reversed its declining trend as a growth of 3.0% YoY was recorded – the highest seen since January (April: 2.3% YoY).

- For 2012, although strong levels of domestic demand could potentially lead to an increase in inflation in 2H12, inflation will likely slow to 2.0% – corresponding to the higher base effect as well as falling growth dampening inflationary pressures.

- In regard to monetary policy, we continue to believe that the current degree of accommodative monetary policy is sufficient in promoting growth while ensuring adequate levels of price stability. As such, we do not expect to see any rate cut in the quarters ahead.

- For the full year, we maintain our view of a GDP growth of around 5%, for now. However, the impact of slower external demand will likely intensify in the near term due to the weak global environment as well as the uncertainties in the Euro area.

Source: AmeSecurities