On a monthly basis, headline consumer inflation slowed down to 0.7% in July while on annual basis, it remained in the negative region for the fifth consecutive month at -1.3%. This brings the average inflation for the first seven months to -0.9%, which is within our base case of -0.6% and a downside of -1.5%.

With headline inflation envisaging to be in the disinflation region in 2020, added with a poor 2Q2020 GDP at - 17.1% y/y, it opens the door for more monetary easing. With the ringgit at a strong level, it also provides ample room for another 25bps OPR cut in September from the current 1.75%. We have factored in a 70% chance of a 50bps OPR cut in September.

• On a monthly basis, headline consumer inflation slowed down to 0.7% in July versus 1% in June. Meanwhile on annual basis, inflation remained in the negative region for the fifth consecutive month at -1.3% from -1.9% in June, bringing the average headline inflation to -0.9%. It accounts for 75% of our lower end of the -1.5% full-year projection and from our base projection of -0.6%.
• Core inflation, a gauge excluding fresh food and administered prices of goods and services, turned flat in July versus 0.1% m/m in June while on annual basis, it read at 1.1% from 1.2% in June. This brings the first seven-month average to 1.3%.
• The higher inflation in July was driven by transport prices, which advanced at 4.9% m/m, despite being relatively lower than June’s 7.8% m/m. The retail pump price rose moderately in the month, with RON95, RON97 and diesel at RM1.69/litre (June: RM1.54/litre), RM1.99/litre (June: RM1.84/litre) and RM1.85/litre (June: RM1.71/litre) respectively following a higher average Brent price at US$43.24 per barrel (June: US$40.27 per barrel) and WTI at US$40.71 per barrel (June: US$38.31 per barrel). In July, Opec+ producers continued reducing the global oil supply by 9.7mil bpd as demand has yet to recover. The compliance was considered high for Opec standards at 97% for the month as top exporters from the Middle East were still pumping below their target, according to a survey.
• The restaurant and hotel segment was the outlier, keeping the lid on higher inflation, sliding 0.1% m/m as compared to -0.4% m/m in June. The recovery movement control order (RMCO) has enabled many sectors to resume operation, including domestic tourism, but consumers remained cautious on recreation and gatherings amidst the pandemic.
• With the headline inflation envisaging to be in the disinflation region in 2020, added with a poor 2Q2020 GDP at - 17.1%y/y, it opens the door for more monetary easing. With the ringgit at a strong level, it provides ample room for another 25bps OPR cut in September from the current 1.75%. We have now factored in a 70% chance of a 50bps OPR cut in September.

Source: AmInvest Research - 19 Aug 2020