Economic Update - Counting the impact of power hike
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Economic Update - Counting the impact of power hike
We expect the average electricity tariff hike of 10.6% for domestic users effective from 1 Jan 2014 to add 0.2% pt to headline CPI growth as electricity consumption carries a weight of 2.88% in the CPI basket. The chain-effect from the power hike will be somewhat muted if history is any guide. We keep our headline inflation forecasts of 2.2% for 2013 and 3.0% for 2014, which continue to bake in some administered price adjustments, especially for fuel. On interest rates, we do not think that Bank Negara Malaysia (BNM) will react immediately to counter the anticipated rise in cost-induced inflation, which could be temporary.
14.89% hike for electricity tariff rates
The government has approved a 14.89% hike in power rates effective from 1 Jan 2014, taking the average tariff rate to 36.22 sen per kWh for industrial users (from 31 sen previously) or an increase of 16.85%, 47.67 sen per kWh for commercial users (from 40.8 sen previously) or +16.85% and 31.85 sen per kWh for domestic users (from 28.8 sen previously) or +10.6%. The electricity tariff was last revised in Jun 2011.
Who is hit hardest on the street?
Industrial and commercial users which collectively consume 78% of the electricity generated will be hit the most. The heavy users of power include electronics & electrical, transport, rubber gloves, building materials, consumer and automotive industries. For consumers, the low-income group will be partially sheltered via 1) free electricity to those who use less than RM20 per month, which was implemented in 2008; 2) the decision to maintain a Lifeline Band on electricity tariff for the first 200kWh at a highly subsidised rate of 21.8 sen/kWh, which was unchanged since 1997; and 3) the decision to maintain the rate at 33.4 sen/kWh for those who consume less than 300kWh per month. This will mean no tariff increase for 4.6m consumers or 70.7% of total households.
Impact on inflation
As electricity consumption makes up a 2.88% weightage in the CPI basket, a 10.6% hike in power rates for domestic users will add 0.2% pt to Jan 2014's headline inflation. The second-round impact of higher power rates depends on the degree of pass-through to end-users. If previous episodes of tariff hikes are any guide, the impact on inflation could be rather muted. Thus, we maintain our CPI growth estimates of 2.2% for this year and 3.0% for 2014, which continue to factor in some administered price adjustments, especially for fuel.
Source: CIMB Daybreak - 03 December 2013, Full PDF Report
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