August CPI down, interest rates unchanged

The lower inflation rate is credited to several factors largely to the zero-rating of GST


Inflation continues to be contained as the consumer price index (CPI) tumbled to 0.2% year-on-year (YoY) in August from 0.9% in July, the lowest level in 42 months.

The lower inflation rate was credited to several factors, largely to the zero-rating of the Goods and Services Tax (GST) and the government’s action to keep RON95 petrol price at one level. The rate was slightly below the consensus forecast of 0.4%.

The smaller rise was also contributed to the high base reported in August 2017, which is 3.7%. Low inflation leaves little reason for the central bank to act on interest rates.

“We don’t see any compelling reason to intervene in the policy rate, given the uninspiring CPI trend so far. Furthermore, as the new government’s fiscal plan is still a work-inprogress, it is premature to intervene as it may only give a wrong signal to the market.

“If any, we believe the central bank may only pre-empt their policy step in the final policy meeting of the year (November). With this, we believe the Overnight Policy Rate (OPR) will remain status quo for the rest of the year,” according to Public Investment Bank Bhd in a research note.

The zero-rated GST had pushed inflation down since June as prices of essential items tumbled and consumers’ spending confidence was boosted. However, pressure on CPI would return with the introduction of the Sales and Services Tax (SST) this month.

JP Apex Research Bhd expects a slight rise in inflation in September 2018. “We maintain our headline inflation for 2018 at 1.5% YoY as we believe the inflationary pressure from the reintroduction of SST will be manageable.

“Also, stabilisation of fuel prices for diesel and RON95 will offset the impact of higher global crude oil prices,” JP Apex said in a market report.

The research house also expects Bank Negara Malaysia to maintain its OPR of 3.25% for the rest of the year.

JP Apex said the food index remained moderate, with food and non-alcoholic beverages accounting for 29.5% in the total CPI, which improved 0.4% YoY for this month, compared to 0.7% YoY last month. It added that this was due to less severe growth in the sub-sectors such as basic food.

Transportation cost dipped to 2.2% YoY in August 2018, compared to 6.7% YoY in July 2018. JP Apex, however, said the index made a minor growth rate of 0.1% on a monthly basis.

Other CPI components such as alcoholic beverages and tobacco, communications, restaurants and hotels recorded modest expansion. Education, however, improved slightly to 1.1% YoY, compared to 1% YoY in July 2018.

Meanwhile, JP Apex said the three states of Negri Sembilan, Wilayah Persekutuan Kuala Lumpur, and Selangor and Wilayah Persekutuan Putrajaya exceedded the national CPI, recording a rate of 0.6%, 0.5% and 0.3% respectively.

“We reckon that inflation rates across the states are still manageable amid the current resilient economic condition,” JP Apex said.