• Headline inflation lost some steam in May, up 4.4% y/y to bring the average first five months to 2.1%.

• 2021 CPI to hover around 3.0% - 3.5% from cost pressures but subdued from high unemployment and excess capacity.

• BNM is expected to maintain OPR at 1.75% in July 7-8 meeting.

• OPR is unlikely to be tightened in 2021 but more so in 2022 despite downside risk to growth.

• Current focus is on managing the pandemic, speed of vaccination and testing plus quarantine.

A. Highlights

• May headline inflation lost some steam to register 4.4%y/y from 4.7% in April (Consensus: 47% y/y). It brings average first five months to 2.1%y/y. (See Chart 1)
• Inflation was supported by transportation (26.0%); housing, water, electricity, gas, and other fuels (3.2%); and food and non-alcoholic beverages (1.5%). (See Chart 2)
• Core CPI (minus fresh foods and administered prices) rose the same pace as in April by 0.8% y/y. This brings the average first five months to 0.7% y/y. (See Chart 3)

B. Key Takeaways

• Headline inflation may have peaked in April at 4.7%y/y. But upwards pressure remains from:
  1. Supply shortages due to the nationwide full lockdown
  2. Elevated global food prices, up 39.7% y/y and 4.8%m/m (Food and Agriculture Organization).
  3. Strong rise in Brent crude oil price, up 85.1%y/y and 9.9%m/m to US$76.18 per barrel. So, RON95 rose 28.9% y/y to RM2.05/liter and stayed there for 4 consecutive months; RON97 by 41.3% y/y & 2.3% m/m to RM 2.67/liter and 21.5%y/y & to RM2.15/liter for Diesel.
  4. Low base effect gradually easing.
• Inflation is expected to hover around 3.0% - 3.5% for the full year (BNM 2.5% - 4.0%). This would mean the average inflation for the next seven months would be around 3.6% to 4.5%.
• Despite heightened uncertainties driven by the pandemic that has added risk on growth due to supply chain disruptions and delay to the reopening of the economy, BNM is expected to maintain the OPR at 1.75% on July 7 to 8 MPC meeting. (See Chart 4)
• And with the focus to manage the pandemic, speed of vaccination and testing plus quarantine, this would mean any rate hike by Bank is unlikely to happen in 2021, but more so in 2022.

Source: AmInvest Research - 28 Jun 2021