The decline in headline inflation extended in Apr by -2.9% YoY (Mar: -0.2% YoY), below the consensus estimate of -1.6% YoY. This was due to decline in housing, utilities & fuels and transport index. While headline inflation posted a deeper contraction, core inflation remained in a positive territory. Nevertheless, as real policy rate has increased, we maintain our expectation for MPC to cut OPR by another 25bps in 2H20 to bring OPR to 1.75%.

DATA HIGHLIGHTS

Headline inflation declined at a steeper pace of -2.9% YoY in Apr (Mar: -0.2% YoY), below the consensus estimate of -1.6% YoY. On a monthly basis, CPI continued to decline by -2.7% (Mar: -1.2%), mainly contributed by transport (-13.5%; Mar: -8.7%) and housing, utilities & fuels (-3.8%; Mar: 0%).

CPI declined on account of the drop in transport (-21.5% YoY; Mar: -8.9% YoY) and housing, utilities & fuels (-2.2% YoY; Mar: +1.6% YoY). Clothing & footwear also declined, but at a softer pace (-1.2% YoY; Mar: -1.3% YoY). Meanwhile, communication rose +1.6% YoY (Mar: +1.5% YoY). Food & non-alcoholic beverages index grew at a sustained pace (+1.2% YoY; Mar: +1.2% YoY).

The steeper drop in transport index (-21.5% YoY; Mar: -8.9% YoY) was attributed to lower fuel prices for the month. RON95 petrol averaged lower at RM1.26 in Apr 2020 as compared to RM2.08 in Apr 2019, following continued weakness in global Brent oil price (USD26.85; Apr 2019: 71.64). Housing, utilities & fuels declined (-2.2% YoY; Mar: +1.6% YoY) due to drop in electricity prices as households are entitled to 6- month discount ranging from 2% to 50% starting from April 2020.

Food inflation grew at a sustained pace of +1.2% YoY (Mar: +1.2% YoY), as higher ‘food at home’ (+1.2% YoY; Mar: +0.9% YoY) offset the moderation in ‘food away from home’ (+1.5% YoY; Mar: +1.6% YoY). Higher growth in ‘food at home’ was supported by increase in meat (+2.6% YoY; Mar: +0.9% YoY), rice, bread & other cereals (+0.8% YoY; Mar: +0.6% YoY) and fish & seafood prices (+0.5% YoY; Mar: +0.3% YoY). This offset the moderation in vegetables (+3.5% YoY; Mar: +5.7% YoY) and decline in milk & eggs prices (-1.1% YoY; Mar: -3.5% YoY). On the global front, food inflation recorded its first decline in 11 months (-3.0% YoY; Mar: +2.2% YoY), owing to lower meat, dairy and sugar prices.

Services inflation slightly moderated to +1.4% YoY (Mar: +1.5% YoY) amid softer growth in furnishings, household equipment & maintenance (+0.3% YoY; Mar: +0.8% YoY), restaurants & hotels (+0.7% YoY; Mar: +0.9% YoY), recreation services & culture (+0.6% YoY; Mar: +0.7% YoY), health (+1.2% YoY; Mar: +1.4% YoY) and education (+1.2% YoY; Mar: +1.3% YoY), which offset the uptick in communication services (+1.6% YoY; Mar: +1.5% YoY).

Core inflation (DOSM) sustained at +1.3% YoY (Mar: +1.3% YoY), supported by uptick in communication (+1.6% YoY; Mar: +1.5% YoY) and steady growth in housing, utilities & fuels (+1.9% YoY; Mar: +1.9% YoY), offsetting the slower decline in clothing & footwear (-1.2% YoY; Mar: -1.3% YoY) and moderation across other index groups.

HLIB’s VIEW

In Jan-Apr 2020, CPI declined by -0.1% YoY (Jan-Mar 2020: +0.9% YoY), largely owing to the decline in transport index and electricity prices. While headline inflation was in the negative territory, core inflation recorded positive growth. We maintain our expectation for the MPC to cut OPR by another 25bps in 2H20 to bring OPR to 1.75%.

Source: Hong Leong Investment Bank Research - 21 May 2020