Headline inflation eased to +1.3% YoY in February (Jan: +1.6% YoY), slightly below the consensus estimate of +1.4% YoY. This was mainly due to moderation in food & non-alcoholic beverages, housing & utilities and transport prices. In the short run, we forecast CPI to record very low growth as Brent oil price remains weak, which leads to petrol price being lower than government’s ceiling price of RM2.08/litre. With no sign of Covid-19 slowing down, we maintain our expectation for the MPC to cut OPR by another 50bps in 2020.

DATA HIGHLIGHTS

Headline inflation eased to +1.3% YoY in February (Jan: +1.6% YoY), slightly lower than the consensus estimate (+1.4% YoY). On a monthly basis, CPI was unchanged (Jan: +0.1%).

CPI softened on account of moderation in food & non-alcoholic beverages (+0.8% YoY; Jan: +0.9% YoY), housing & utilities (+1.6% YoY; Jan: +1.7% YoY), furnishings, household equipment & maintenance (+1.0% YoY; Jan: +1.2% YoY), transport (+2.4% YoY; Jan: +3.9% YoY) and recreation services & culture (+0.7% YoY; Jan: +0.9% YoY) while clothing & footwear continued to register a decline (-1.1% YoY; Jan: -1.2% YoY).

The transport index slowed to +2.4% YoY (Jan: +3.9% YoY) amid the smaller increase in RON95 petrol price compared to the same period in 2019 (+3.8% YoY; Jan: +6.5% YoY). On a monthly basis, the index fell -1.0% (Jan: +0.1%) as RON95 petrol price dropped to RM2.07/litre, below the ceiling price of RM2.08/litre. This was also reflected by the fall in global Brent oil price during the month (USD55.48; Jan: USD63.77).

Food inflation eased slightly to +0.8% YoY (Jan: +0.9% YoY) amid continued decline in prices of meat (-2.8% YoY; Jan: -4.5% YoY) and milk & eggs (-3.8% YoY; Jan: - 2.7% YoY). Fish & seafood (-0.1% YoY; Jan: +1.2% YoY) also fell, while vegetable prices picked up (+6.3% YoY; Jan: +5.7% YoY). On the global front, food inflation moderated (+8.1% YoY; Jan: +11.3% YoY) due to slower growth in most commodity groups alongside a decline in cereals, offsetting the rise in sugar prices.

Services inflation softened to +1.5% YoY (Jan: +1.8% YoY) due to moderation in furnishings, household equipment & maintenance (+1.0% YoY; Jan: +1.2% YoY), health (+1.3% YoY; Jan: +1.4% YoY), education (+1.3% YoY; Jan: +1.7% YoY) and recreation services & culture (+0.7% YoY; Jan: +0.9% YoY). Meanwhile, growth in restaurants & hotels sustained (+1.1% YoY; Jan: +1.1% YoY).

Core inflation (DOSM) also eased to +1.3% YoY (Jan: +1.7% YoY) amid broad-based moderation across index groups, with the exception of continued decline in clothing & footwear (-1.1% YoY; Jan: -1.2% YoY) and steady growth in communication (+1.5% YoY; Jan: +1.5% YoY), restaurants & hotels (+1.1% YoY; Jan: +1.1% YoY) and miscellaneous goods & services (+2.5% YoY; Jan: +2.5% YoY).

HLIB’s VIEW

We expect CPI to record very low growth in the immediate term as Brent oil price remains weak, which leads to petrol price being lower than government’s ceiling price of RM2.08/litre. In addition, the acceleration in new Covid-19 cases worldwide also poses a downside risk to our global oil and CPI forecast. With no sign of the pandemic slowing down, we maintain our expectation for the MPC to cut OPR by another 50bps in 2020 to 2.00% in an effort to strengthen policy support to the economy.

Source: Hong Leong Investment Bank Research - 26 Mar 2020