Economic Update - Inflation moderates further, no rate review till end-2012

- Malaysia’s inflation rate continues to ease further to 2.1% YoY in March (February: 2.2% YoY), the lowest since November 2010 – in line with both our house estimate and market expectations (Bloomberg Poll).

- Slower growth rates were seen across the major groups. The index for Non-Food rose at a slower rate of 1.7% YoY (February: +1.8%), as the transport category eased to 1.3% YoY (February: +1.4%) - potentially signaling the ebbing effect of the impact of cuts in petrol subsidy at the beginning last year.

- Prices of Food & Non-Alcoholic Beverages, the group with the largest weightage in the inflation index, also remained steady at 2.9% YoY last month.

- Overall, while inflation in most countries is expected to fall in the coming months, a significant downside risk continues to be the high levels of crude oil prices, including in Malaysia. However, in the medium term, a correction in prices is still on the cards on the back of an anticipated decline in global demand as well as improvements on the supply side.

- For Malaysia, despite the sustained rise in commodity prices, particularly in crude oil, we still forecast inflation to moderate to 2.5% for 2012, from 3.2% in 2011.

- In regard to monetary policy, given the expected level of GDP growth remaining robust and the potential threat of rising inflation, we do not see any rate review for the rest of the year. OPR will remain at the current level of 3% throughout 2012.

- In line with the recent data so far, we estimate that 1Q12 GDP growth to slip just below 5% YoY - but, still near the trendwise growth of 5%.

- For the remainder of the year, however, we expect GDP growth to improve thereafter, even rebound sharply to near 6% in 2H12, which would average the annual growth to around 5% this year.

- Apart from a strong domestic demand, we also anticipate some stability in the Eurozone economies by the end of the year, a stronger US economy in the coming quarters, as well the further roll-out of major ETP projects in the coming months. In addition, the moderating inflationary pressures would also be positive for the domestic economy in 2012.

Source: AmeSecurities