Headline inflation accelerated to 1.5% y/y in June from 0.2% y/y in May, fuelled by the low-base effects arising from the removal of the Goods and Services Tax (GST) in 2018. Meanwhile, underlying inflation jumped by 1.9% y/y in June from 0.4% y/y in May supported by gains from across the board. Following a strong June headline inflation figure, the 1H2019 average inflation was +0.2%y/y, moving away from the deflationary period for the first five months of 2019 (-0.1% y/y).

We continue to maintain our view that inflation will remain tame in 2019 as underlying inflation is poised to remain weak. Thus, we are maintaining our 1.0% projection for 2019. Underpinned by a low inflation environment added with global monetary easing, we feel there is room for the authorities to further reduce the policy rate in a move to support growth. At the moment, we are maintaining our 40% chance of another rate cut sometime in 2H2019 should the external and/or domestic headwinds intensify.

• Headline inflation accelerated to 1.5% y/y in June from 0.2% y/y in May, but was marginally below market expectations of 1.6%. It is the highest reading since May 2018. The surge in inflation was fuelled by the low-base effects arising from the removal of the Goods and Services Tax (GST) in 2018. On a month-on-month basis, inflation rose at the same pace as in May by 0.2%.

• Meanwhile, underlying inflation jumped by 1.9% y/y in June from 0.4% y/y in May supported by gains from across the board. Food and non-alcoholic beverages rose higher to 2.3% y/y from 1.8% y/y in May partly due to the Hari Raya Aidilfitri celebration throughout June. Utilities prices accelerated to 3.1% y/y from 0.5% y/y in May.

• However, transport prices reported a smaller decline in June by -2.1% y/y from -2.5% y/y in May. During the month, fuel pump prices like RON97 fell by 2.5% y/y with an average of RM2.52 per litre in June from +11.0% y/y in May with an average of RM2.74 per litre. Both RON95 and diesel prices per litre remained unchanged at RM2.08 and RM2.18/litre in June. However, on a y/y basis, RON95 price per litre rose 5.5% while diesel price per litre was flat.

• A strong June headline inflation figure resulted in the overall average inflation in 1H2019 reading at 0.2%y/y, moving away from the deflationary period for the first five months of 2019 at -0.1%y/y. We continue to maintain our view that inflation will remain tame in 2019 as underlying inflation is poised to remain weak.

• Thus, we are maintaining our 1.0% projection for 2019. The weak food component, reintroduction of the Sales and Service Tax (SST) in September 2018 and delayed implementation of targeted fuel subsidies, which would have elevated consumer fuel prices to market levels in 2Q2019, are key factors that allow us to maintain our inflation target.

• Underpinned by a low inflation environment added with global monetary easing, we are of the view that there is room for the authorities to further reduce our policy rate in a move to support growth. At the moment, we are maintaining our 40% chance of another rate cut sometime in 2H2019 should the external and/or domestic headwinds intensify.

Source: AmInvest Research - 25 Jul 2019