Malaysia: Benign Inflation For Remainder of the Year

Malaysia: Benign Inflation For Remainder of the Year

• Low inflation remained the norm in Aug as headline inflation rose by 1.4% yoy, the same pace as in Jul and the lowest
  since Mar 2010.  This was in line with both consensus and our expectations of 1.4%.   As a result of the end-of-Ramadan
  celebrations, food prices, transport cost and furnishing cost rose by 2.8%, 0.0% (a slight deterioration from Jul’s -0.2%) and
  1.9% yoy respectively.  In contrast, the other components of the CPI basket either showed improvement or were
  unchanged from the previous month.  For example, housing cost was up 1.5% yoy in Aug, unchanged from Jul.  Helping to
  keep prices benign so far are the subsidies on certain foodstuff like sugar and fuel that have helped to mitigate demand-pull
  inflation resulting from strong domestic demand.

• Looking ahead, we expect inflation to remain benign for the rest of the year, barring a supply shock or disruption.  While
  demand-pull inflation from strong domestic demand (as a result of government spending on infrastructure and ETP projects
  as well as higher private consumption spending) could lift prices domestically, continued government subsidies and price
  caps should keep inflation manageable.  As well, steady policy rate of 3.00% to date has helped to anchor inflationary
  expectations.  Inflation should average about 1.5% in the last four months of the year vs. the 1.8% yoy we have seen for the
  first eight months of 2012.  We now expect inflation to rise by 1.4% and 1.5% yoy in 3Q and 4Q respectively and to average
  1.7% for the full-year.  For 2013, we are maintaining our inflation forecast of 2.5% for the moment.  This is because we
  expect fiscal consolidation to take place following the general elections, resulting in the resumption of subsidy
  rationalization (such as fuel subsidy cuts) which could see prices rise.  Moreover, the economy is also likely to continue to
  expand healthily by 4.9% in 2013.

• With only one more policy meeting to go in Nov, it is unlikely that Bank Negara would change policy direction given the low
  inflation environment so far.  However, with inflation risks tilted to the upside in 2013, we think that the central bank could
  move to curb inflationary pressures from building up following any subsidy rationalization (as discussed above).   However,
  any moves would likely come only after the general elections are over and barring any event shocks.  We think that should
  inflation start to pick up, the central bank could respond by hiking the overnight policy rate by 50 bps in 2013 (possibly by 25
  bps each in 2Q and 3Q).  Until then, Bank Negara is expected to keep its policy steady at 3.00%.

Source: OSK