Malaysia:Milder October Inflation Won't Derail Rate Hike

?Headline inflation edged lower to 3.7% y/y in October (4.3% in Sep), belows ours (4.3%) andmarket estimates (4.1%). Year-to-date inflation averaged 4.0% in Jan-Oct.

    ?Inflation ebbs due to milder gains in food and non-alcohol beverages, and transport prices.

    Meanwhile clothing, and footwear and communications recorded wider declines.

    ?Core inflation inched lower to 2.3% y/y in October (vs. 2.5% in Jan-Sep). Durable and nondurableitems posted slower gains of 1.1% and 5.8%, while services inflation rose to 2.8%.

    ?We project headline inflation between 3.5% - 3.8% in Nov-Dec, bringing full year inflation to3.9% in 2017. In 2018, inflation is expected to moderate to 2.5% on the back of a high baseeffect and assumption of global oil prices between US$50-60/bbl.

    ?The milder CPI gain in coming months, we think, is unlikely to deter Bank Negara Malaysia(BNM) from normalising interest rates earlier next year. Following the strong GDP growth of6.2% in 3Q 2017, BNM communicated that “favorable economic prospects accord greaterflexibility to review the degree of monetary accommodation.” BNM stressed that any moveto raise rates is not akin to tightening monetary conditions but normalisation of interest rates.

    ?USD/MYR moved above the 4.09 support level today. Over the last four weeks, Ringgit hada good run from 4.24 to 4.10, on the back of positive signals from BNM alongside weakerUSD and higher oil prices above US$60. We remain constructive on the pair (Macro+FXStrategy Note: MYR To Strengthen Further On Increasing Positive Factors).

    ?We have penciled in one 25bp OPR hike in 2018 and do not rule out the possibility of tworate hikes next year, provided that growth momentum stays strong (at least 5.0%-5.5%range). We believe markets have only priced in one rate hike at this juncture. Higher oddsfor two rate hikes will fuel the Ringgit further.