Malaysia's headline Consumer Price Index rises in July, likely to average about 1.5 pct in H2 2016

Malaysia's headline Consumer Price Index for July rose by 1.1 per cent compared to a year ago, data released by the Statistics Department showed on Wednesday. Prices of alcoholic beverages and tobacco were up 19.9 percent, food and non-alcoholic beverages rose 3.8 percent and housing, water, electricity, gas and other fuels were up 2.4 percent.

Core inflation, which excludes most volatile items of fresh food, as well as administered prices of goods and services, rose 2 percent in July 2016 versus a year ago.

A confluence of factors is weighing on the price barometer. The lapsing of the GST impact and a high base in the same period last year will continue to keep a lid on inflation readings. Moreover, imported inflationary pressure will remain low too.

Bank Negara surprisingly cut the Overnight Policy Rate (OPR) by 25bps to 3.00 percent at its latest meeting. Indeed, the lower than expected inflation is certainly one of the key factors contributing to the surprise rate cut. The central bank has lowered its inflation expectation to 2-3 percent, down from 2.5-3.5 percent previously.

"Headline CPI inflation will likely average about 1.5 percent in the second half of the year and register 2.1 percent for the full year, before trending gradually higher to 2.4 percent in 2017. That essentially means that the central bank may be on hold for the time being and preferring to gauge economic conditions, particularly on growth, before its next move," said DBS Group Research.