Headline inflation dipped -0.2% YoY in March (Feb: +1.3% YoY), slightly below the consensus estimate of -0.1% YoY, largely owing to the steep decline in transport index. We forecast CPI to record negative growth in the immediate term due to weak Brent oil price. As the brunt of Covid-19 impact is expected to be felt in 2Q20, we maintain our expectation for the MPC to cut OPR by another 50bps in 2020, as early as 5th May 2020 MPC meeting.

DATA HIGHLIGHTS

Headline inflation sank -0.2% YoY in March (Feb: +1.3% YoY), slightly lower than the consensus estimate (-0.1% YoY). On a monthly basis, CPI declined by -1.2% (Feb: 0%), mainly contributed by transport (-8.7%; Feb: -1.0%) and restaurants & hotels (- 0.2%; Feb: +0.2%).

CPI declined on account of the steep fall in transport (-8.9% YoY; Feb: +2.4% YoY) and clothing & footwear (-1.3% YoY; Feb: -1.1% YoY), but was partially offset by the increase in food & non-alcoholic beverages (+1.2% YoY; Feb: +0.8% YoY) and sustained growth in housing, utilities & fuels (+1.6% YoY; Feb: +1.6% YoY).

The transport index recorded a sharp drop of -8.9% YoY (Feb: +2.4% YoY) amid lower RON95 petrol price compared to the same period in 2019 (RM1.72; Mar 2019: RM2.08). This follows the plunge in global Brent oil price during the month (USD33.73; Mar 2019: USD67.03).

Food inflation picked up by +1.2% YoY (Feb: +0.8% YoY), driven by rebound in meat (0.9% YoY; Feb: -2.8% YoY), fish & seafood (+0.3% YoY; Feb: -0.1% YoY) as well as higher oils & fats (+1.4% YoY; Feb: +0.3% YoY) and fruits prices (+0.6% YoY; Feb: +0.1% YoY) which offset the continued decline in milk & eggs prices (-3.5% YoY; Feb: -3.8% YoY). On a global scale, food inflation decelerated to +2.7% YoY (Feb: +7.8% YoY) amid decline in dairy, cereals and sugar prices, but contracted further on a monthly basis (-4.3%; Feb: -1.6%) as Covid-19 outbreak-related demand contractions led to lower prices for all sub-indices.

Services inflation sustained at +1.5% YoY (Feb: +1.5% YoY) as the slight uptick in health (+1.4% YoY; Feb: +1.3% YoY) countered the moderation in furnishings, household equipment & maintenance (+0.8% YoY; Feb: +1.0% YoY) and restaurants & hotels (+0.9% YoY; Feb: +1.1% YoY).

Core inflation (DOSM) also sustained at +1.3% YoY (Feb: +1.3% YoY), supported by the slight pickup in health (+1.4% YoY; Feb: +1.3% YoY) and transport indices (+0.3% YoY; Feb: +0.2% YoY), which offset the slower growth in furnishings, household equipment & maintenance (+0.8% YoY; Feb: +1.0% YoY), restaurants & hotels (+0.9% YoY; Feb: +1.1% YoY) and steeper decline in clothing & footwear (-1.3% YoY; Feb: -1.1% YoY).

HLIB’s VIEW

As global Brent oil price is expected to remain weak in the immediate term, we expect CPI to record negative print in 2Q20. Contraction in global and domestic demand as a result of worldwide lockdowns to mitigate the spread of Covid-19 also poses downside risks to our global oil and CPI forecast. With the brunt of Covid-19 impact expected to be felt in 2Q20, we maintain our expectation for the MPC to cut OPR by another 50bps in 2020, as early as 5th May 2020 MPC meeting.

Source: Hong Leong Investment Bank Research - 23 Apr 2020