24 January 2018
Elevated consumer price inflation in Malaysia

We forecast Bank Negara Malaysia (BNM), the central bank, to raise the policy rate by 25bp tomorrow

Near-doubling of inflation in 2017

Malaysia reports consumer price inflation data for December today. The Bloomberg consensus, of which we are a part, is centred on a 3.5% year-on-year CPI inflation, an uptick from 3.4% in November. If materialized, this will put the full-year 2017 average inflation at 3.9%, almost double than 2.1% in 2016 and close to the top end of the central bank’s 3-4% forecast.

Food and transport prices have been the main inflation drivers. While we expect these factors to remain in play this year, the normalization of base effects from administered fuel price hikes in early 2017 will likely depress the year-on-year inflation rate. Moreover, expectations of continued appreciation of the Malaysian ringgit, thanks to country’s strong economic fundamentals, dampens imported inflation, especially the transmission of rising global oil price to domestic fuel prices. We forecast 3% average CPI inflation in 2018, in the middle of the 2.5-3.5% official forecast for the year.

BoJ - no change to statement but is it credible?

BoJ Governor Kuroda sticks to the old message - no hint of taper  

Data improvements fail to change BoJ stance

BoJ policymakers made use of the Ctrl-C, Ctrl-V function again with a near identical policy statement to those of recent months, no change in their targeted asset purchases, no change to their target bond yields and no change to their negative policy rates. Even the dissent from Kataoka was nearly unchanged. 

BoJ watchers had imagined that there might be some clue or even vague hint of future policy change at the BoJ conference. But instead, Governor Kuroda stuck very firmly to the message that nothing is going to change anytime soon. 

According to Kuroda, the Japanese economy still requires persistent monetary easing. He went on to justify what seems a less and less credible statement with the comment that inflation was still too weak to change policy (maybe, or more likely, they are targeting an inappropriate inflation rate).

One new addition to the argument was to say that there would be no sustainable inflation without wage rises. So it now seems as if rising wage inflation has become a necessary, though probably not sufficient condition for BoJ policy to change. 

Singapore inflation throws tightening into doubt

We forecast a modest and gradual appreciation for the Singapore dollar nominal effective exchange rate (SGD NEER) at the Monetary Authority of Singapore's (MAS') April meeting, but as time goes on, the data support this call less and less 

Inflation fails to move higher

We had been looking for a modest increase in Singapore's December inflation figures, though one that would still leave inflation below 1.0%YoY. In the event, the much more gloomy consensus figure of 0.5%YoY was closer to the mark, though even this proved to be too optimistic, as headline inflation fell to 0.4%YoY. If this has been a downspike in an otherwise upbeat trend, we would be less concerned. In contrast, this latest data reinforce what has been a very persistent weak inflation backdrop, and one which comes against only modest growth in the domestic economy.  

Within the data, there are few elements that jump out as aberrations that may revert to a stronger path in the near future. Though the drop in clothing and communications equipment may be a sign of strong discounting during the holiday period and could revert to higher levels in 1Q18.

Can MAS tighten if inflation remains soggy and domestic economy soft?

Why this leaves us feeling awkward is that by now, we had hoped that the conditions for a modest and gradual appreciation of the SGD NEER would be apparent. They are not. Though we can't quite bring ourselves to jettison what looks to us to be a very marginal call for some tighter policy at the April MAS meeting.

Core inflation also remains weak at 1.3%YoY, though it is within the MAS' 1-2% forecast range, so as long as it stays there, one could argue that the forecast is still on track. And the MAS also did not expect a notable pick up in the domestic economy either, so that arguably is also still on track, though hardly compelling for our forecast of policy.

In the end, the only remaining justification for our forecast of a change in the MAS stance is for them to close the normalization gap currently being opened by the Fed's cautious hikes, and perhaps as a hedge against a reversal in the fortunes of the USD. Because whilst the USD remains weak, there are few reasons for any Asian central banks to undermine their domestic economy's and tighten monetary policy.

Philippines: Strong growth can be sustained in 2018

The Philippine economy grew 6.7% in 2017 in line with consensus and within the government target of 6.5% to 7.5%. This forms a good base for sustained 2018 growth

Philippine economy grows in line with 2017 government target

The Philippine government announced that the economy grew by 6.7% in 2017, slower than the 6.9% achieved in 2016. Nevertheless, last year's growth was within the government's target of 6.5% to 7.5%. Fourth quarter growth of 6.6% was a shade slower than the consensus forecast of 6.7%. Domestic demand activity remained robust, led by strong household and government spending. Business spending moderated as private construction activity remained weak. 

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Good MornING Asia - 24 January 2018

The message from the slopes of Davos - No room for complacency...

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