PP 7767/09/2010(025354)

Malaysia
Economic Highlights
•MARKET DATELINE

23 April 2010

Inflation Rate Inched Up Marginally To +1.3% Yoy

In March

◆ The headline inflation rate inched up slightly to 1.3% yoy in March, from +1.2% in February. This was the
fourth consecutive month of increase but it has been hovering at around 1.2-1.3% in the 1Q, indicating that price
pressure remained not strong, as traders might have difficulties in raising prices due to keen competition. Stronger
growth was due to a pick-up in food & non-alcohol beverage prices, while the core inflation rate remained stable
during the month.

◆ Going forward, inflation will likely increase at a faster pace and we expect it to trend up to 2.0% in 2010, from
+0.6% in 2009, in line with a pick-up in domestic demand and the Government’s move to gradually remove some
of its subsidies.

◆ Given that Malaysia is already ahead of the curve, we believe Bank Negara Malaysia will not be in a hurry to increase
its interest rates further. Future rate hike will likely occur at a measured pace. As a result, we expect the Central
Bank to pause in May’s meeting but will likely raise the overnight policy rate (OPR) by another 25 basis
points to 2.5% in July. Thereafter, the OPR will likely stay at this level for the rest of this year.

The headline inflation rate inched up slightly to 1.3% yoy in March, from +1.2% in February (see Table 1). This
was the fourth consecutive month of increase but it has been hovering at around 1.2-1.3% in the 1Q, indicating that price
pressure remained not strong, as traders might have difficulties in raising prices due to keen competition. Stronger
growth was due to a pick-up in food & non-alcohol beverage prices, while the core inflation rate remained

Table 1
Weights In The CPI
New 2008 2009 2010 2010 2009 2010
(2005=100) Feb Mar Feb Mar (Jan-Mar)
Group: Weights (%) %,yoy %,mom %,yoy %,Cum yoy

Food & non alcoholic beverages 31.4 8.8 4.1 +0.1 -0.1 1.3 1.7 9.3 1.4
Alcoholic beverages & tobacco 1.9 7.3 6.1 0.0 +0.1 3.0 3.0 8.3 2.9
Clothing & Footwear 3.1 -0.5 -0.9 -0.8 -0.1 -2.2 -1.6 -0.7 -1.5
Housing, water, electricity & gas 21.4 1.6 1.4 +0.1 0.0 0.9 1.0 1.6 1.0
Furnishings, Household equipment 4.3 3.0 2.9 -0.1 +0.2 0.6 0.7 4.7 0.7
Health 1.4 2.2 2.3 +0.2 -0.1 1.5 1.4 2.6 1.5
Transport 15.9 8.8 -9.4 +0.1 -0.1 0.8 0.7 -2.1 0.7
Communication 5.1 -0.6 -0.5 0.0 -0.1 -0.4 -0.4 0.5 -0.4
Recreation services & culture 4.6 1.8 1.5 0.0 0.0 2.6 2.7 1.0 2.7
Education 1.9 2.3 2.4 +0.2 +0.2 1.7 1.8 2.6 1.7
Restaurant & hotels 3.0 6.6 2.9 +0.3 +0.3 1.5 1.7 4.4 1.5
Miscellaneous goods & services 6.0 3.3 3.8 -0.2 0.0 2.5 2.4 3.3 3.1

TOTAL 100.0 5.4 0.6 0.0 0.0 1.2 1.3 3.7 1.3
Core CPI 68.6 3.7 -1.1 -0.1 +0.1 1.1 1.1 1.1 1.2

Peck Boon Soon

(603) 9280 2163
Please read important disclosures at the end of this report.
bspeck@rhb.com.my

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 23 April 2010

stable during the month. Food & non-alcohol beverage prices grew at a faster pace of 1.7% yoy in March, compared
with +1.3% in February. The core inflation rate, on the other hand, remained stable at +1.1% yoy in March, the same
rate of increase as in February. A pick-up in the prices of furnishing & household products and the costs of housing,
water, electricity, gas & other fuels; recreation services; education and charges at restaurants & hotels as well as a
smaller drop in the prices of clothing & footwear were mitigated by slower increases in the costs of transport and
healthcare. The prices of alcoholic beverage & tobacco and the costs of and communications, on the other hand,
remained stable during the month.

A reclassification of items according to their durability and services rendered showed that the pick-up in inflation rate
was due to faster increases in prices of non-durable goods and the costs of services as well as a smaller decline in prices
of semi-durable goods. These were, however, mitigated by a slowdown in prices of durable-goods during the month.

Mom, inflation rate remained unchanged in March, the same as in February and compared with +0.2% in January.
A faster increase in the core inflation rate was mitigated by a decline in food & non-alcohol beverage prices. The core
inflation rate rose by 0.1% mom in March, a rebound from -0.1% in February. This was reflected in a pick-up in prices
of alcoholic beverage & tobacco and furnishing & household products as well as a smaller decline in the prices of clothing
& footwear. These were, however, mitigated by declines in the costs of healthcare, transport and communications. The
costs of education and charges at restaurants & hotels, on the other hand, remained stable, while the costs of housing,
water, electricity, gas & other fuels and recreation services were unchanged during the month. Meanwhile, food & non-
alcohol beverage prices fell by 0.1% mom in March, after easing to +0.1% in February.

In the first three months of 2010, inflation rate eased to 1.3% yoy, from +3.7% in the corresponding period of 2009.
This was attributed to a slowdown in food & non-alcohol beverage prices, which was offset partially by a pick-up in the
core inflation rate. Stronger core inflation rate was due mainly to a rebound in the costs of transport.

Going forward, inflation will likely increase at a faster pace and we expect it to trend up to 2.0% in 2010,
from +0.6% in 2009, in line with a pick-up in domestic demand. Higher crude oil price, which is projected to fluctuate
at between US$80-100/barrel in 2010, compared with an average of US$62/barrel in 2009, and commodity prices will
also contribute to higher inflationary pressure. In addition, the Government plans to gradually remove some of the
subsidies in order to reduce its financial burden. Already, the Government has allowed sugar price to be increased by
20 sen and it has removed the subsidy for white bread at the beginning of the year. Nevertheless, given that output
is recovering from low levels, the resultant pressure on inflation from the narrowing output gap is expected to be limited.
Similarly, the core inflation is likely to exhibit a modest upward trend and is not expected to be a source for policy
concern. Meanwhile, the Government had scrapped its petrol subsidy restructuring scheme, which it plans to implement
in May and it has no plan to raise or reduce retail petrol prices for now.

Whilst inflation is not a major concern for policymakers, the threat of a fundamental recession is diminishing. This implies
that a very high degree of monetary stimulus was considered no longer warranted. Also, maintaining interest rates at
too low a level over an extended period could encourage excessive risk taking behaviour, and the unhealthy build up
of financial imbalances. As a result, BNM has begun to normalise its monetary conditions by raising the overnight policy
rate (OPR) by 25 basis points to 2.25% on 4 March. Given that Malaysia is already ahead of the curve and faster
compared to regional economies in terms of normalising its monetary conditions, we believe Bank Negara Malaysia will
not be in a hurry to increase its interest rates further. Future rate hike will likely occur at a measured pace. Furthermore,
the recovery in the global economy will likely be uneven and neighbouring countries have delayed their moves in raising
interest rates, as inflation, though trending up, remains not a major threat to regional economies. As a result, we expect
the Central Bank to pause in May’s meeting but will likely raise the overnight policy rate (OPR) by another
25 basis points to 2.5% in July. Thereafter, the OPR will likely stay at this level for the rest of this year. We expect
the Central Bank to raise its key policy rate again in early part of 2011 and by a total of 50 basis points during the year,
pushing the OPR to a more normal level of 3.0% by end-2011.

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 23 April 2010
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