The headline inflation rate inched
higher to 2.8% y-o-y in October, from +2.6% in the previous month. The fuel
price hike on 2 October exerted some pressure on inflation but was mitigated
by the higher base effect when fuel prices were raised in September 2013. The
higher inflation in October was reflected in a faster increase in the core
inflation rate, largely due to a sharp pick-up in transportation cost. In
contrast, the prices of food & non-alcoholic beverages inched lower in
September. Separately, the Government announced on 21 November that retail
prices for RON95 petrol and diesel will be fixed on a managed float system
from 1 December, effectively shifting towards a market determined policy
mechanism on fuel prices. The Government, however, has said that it may
consider introducing a multi-tiered targeted fuel subsidy mechanism later if
oil prices were to spike up again and this is to take care of rising cost of
living for the mid- to lower-income groups of the population. We believe it
is a right move, as it could ease the Government’s burden on subsidy given
that falling crude oil prices will impact the Government’s oil revenue
negatively and put pressure on its budget deficit. We do not expect the move
to impact the economy significantly, as we believe consumers and businesses will be able to adjust to it and will likely get used to
it over time.
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