Malaysia Economic Flash – Further Moderation in November CPI Inflation Increases Chance of At Least Another 50bps Rate Cut in 1Q09

Announced: Friday, 19 December at 5:00 pm (Malaysia time)
CPI (% YoY): Actual: 5.7%, Forecast: 6.4%, Consensus: 6.7%, Previous: 7.6%
Bottom Line
November CPI data suggests that the moderation in CPI inflation has continued to gather pace, led largely by further cuts in petrol pump prices. The moderation in CPI inflation appears to be broadening beyond the food and transport category, suggesting that inflation could come down more rapidly going forward. Overall CPI inflation for the period between January and November 2008 which came in at 5.5%yoy, is already below our full-year forecast of 5.7%. On balance, the data continues to suggest that inflation concerns have taken a back seat, and we maintain our view that Bank Negara would cut policy rates by at least 50bps in 1Q09 to contain downside risks to growth. This data should on balance be positive for the bond markets in the near term.

In Brief
CPI inflation moderated significantly in November to 5.7% from a year ago, down from the 7.6% recorded in October. This was substantially lower than market expectations for a 6.7% increase. On a month-on-month (seasonally unadjusted) basis, inflation fell 1.1%, declining further from the 0.4% and 0.2% drop in October and September respectively.

The moderation in year-on-year inflation rate reflects the successive cuts in petrol prices in mid-November, following earlier consecutive monthly cuts from August to October due to the precipitous fall and global crude oil prices which recently dipped below the US$40/bbl level. Consequently, transport price inflation slowed by more than half to 6.2% yoy from the 13.8% recorded in October. On a month-on-month basis, transport cost fell 6.7% in November compared to October. The government has continued to slash pump prices in early December, lowering prices for RON97 (RM1.90/liter) and RON92 (RM1.80/liter) and this would likely cost transport costs to moderate further in the next few months.

In total, only two out of 12 categories in the CPI basket showed a higher reading in November compared to October. Cost of Alcohol/Tobacco (Nov: 8.4%; Oct: 8.3%) and healthcare costs (Nov: 2.8%; Oct: 2.6%) rose in year-on-year terms compared to October. Besides Transport, Food/Beverages (Nov: 11.0%; Oct: 12.1%), Clothing/Footwear (Nov: -0.5%; Oct: 0.1%), Communication (Nov: -0.6%; Oct: -0.5%), Restaurant/Hotels (Nov: 5.6%; Oct: 6.6%) and Miscellaneous (Nov: 2.4%; Oct: 4.2%) showed year-on-year moderations while the other components in the CPI basket grew at the same pace in November as compared to October. CPI ex-food (Nov: 3.2%; Oct: 5.5%), ex-transport (Nov: 5.6%; Oct: 6.3%) and ex-food and transport (Nov: 2.3%; Oct: 2.8%) all moderated in November from October.