The economy remained in the deflationary region for the two consecutive month with the headline inflation down -0.4%y/y though core inflation inched up slightly to 0.3%y/y. Though we expect headline CPI to potentially move into the positive region, partly due to base effects, we believe the underlying inflation remains weak as indicated by the forward looking data.

Key macro data that unveils current economic conditions and more importantly forward looking are still exhibiting signs of weakness. With a weak underlying inflationary pressure added with the risk of a slower economic outlook, we expect Bank Negara Malaysia (BNM) has a strong case for policy easing. The question is whether BNM will move ahead of the curve or otherwise?

• February’s headline inflation turned deflationary for the second consecutive month. It fell by -0.4%y/y from -0.7%y/y in January, which fell in line with our expectation while consensus looked at -0.3%y/y. Average inflation for the first two months fell -0.6%y/y.

• Meanwhile, core inflation rose to 0.3% y/y from 0.2% y/y in January. It brings the average two months at +0.3%. While food prices grew at the same pace of 1.0% y/y for the second consecutive month, the non-food prices reported a drop for the second straight month by 1.0%y/y from -1.5%y/y in January.

• Drag on non-food prices came from transport prices that fell by 6.8% y/y in February from -7.8% y/y in January. In line with global oil prices, our petrol pump prices fell across the board for RON 95, RON 97 and diesel by -12.1%y/y, -9.6% y/y, -2.8% y/y respectively from -13.1% y/y, -10.5% y/y, -8.4% y/y, respectively in January.

• We expect inflation number to improve gradually as we move ahead partly supported by the low base. Key macro data that unveils current economic conditions and more importantly forward looking are still exhibiting signs of weakness. With a weak underlying inflationary pressure added with the risk of a slower economic outlook, we expect Bank Negara Malaysia (BNM) has a strong case for policy easing. The question is whether BNM will move ahead of the curve or otherwise?

Source: AmInvest Research - 25 Mar 2019