CIMB Research sees 25bp hike in OPR in Sept

KUALA LUMPUR: CIMB Economics Research is maintaining its expectations
of another 25 basis points hike in September, which would increase the
overnight policy rate (OPR) to 3.25% by end-2011.
It said on Thursday, July 21 that despite pausing interest rate at 3%
on July 7, it believes that Bank Negara Malaysia (BNM) is not wavering
from its rate normalisation path.
CIMB Research said the decision to pause in July was justifiable as growth prospects are more of a worry now than inflation.
“We continue to expect BNM to resume its normalisation when the
growth fears subside. BNM reiterated that the risks to inflation are on
the upside due to supply factors and possibly some signs of domestic
demand pressure on prices in 2H11.
“We maintain our expectation of another 25bp rate hike in September, taking the policy rate to 3.25% by end-2011,” it said.
Commenting on the consumer inflation in June at 3.5% on-year (3.3% in May), this was the fastest pace in 27 months.
CIMB Economics Research said the June CPI was in line with its expectations of 3.4% and market forecast of 3.6%.
It said core inflation, which excludes changes in the prices of food
and energy, also edged higher to 1.9% in June (1.8% in May), lifted by
higher prices of clothing and footwear as well as restaurant and hotels.
In the first half of 2011 (1H11), inflation increased 3.0%.
In its analysis, it said food prices inched up to 4.7% (4.5% in May),
driven largely by costlier chicken, fish and vegetables. The average
7.12% electricity tariff hike in Jun had a manageable knock-on impact on
overall inflation as the “housing, water, electricity, gas and other
fuels” category rose 1.9% on-year and 0.1% on-month in June.
“This was because of the tariffs for ‘lifeline band’ consumers
consuming up to 200kWh and the next 100kWh are retained,” it added.
As for transport prices, they eased to 5.8% in June (6.0% in May),
due to the 10 sen per litre cut in petrol RON97 to RM2.80/litre on June
16.
CIMB Economics Research said inflation had probably peaked in June. It expected inflation to ease in 2H11.
It said this was because the food inflation and transport price
index, which accounted for 2.1% of the increase in the headline
inflation in 1H11, had come close to returning to its historical month
over month trend growth rate.
The second factor was the base effect -- inflation was much lower
(average 1.5% on-year) in 1H10 than in 2H10 (average 1.9% on-year).
As such, the combination of slower on-month price growth and a higher
year ago base would result in a slight drop in inflation to 3.2-3.4%
on-year in 2H11.
“We maintain our estimate of CPI growth of 3.2% for this year,” it said.