Magnitude of Decline in Transport Cost Has Gradually Decreased

Malaysia’s headline inflation was unchanged at 0.2% yoy in May, the same rate of increase for the third consecutive month since March. It was also slightly lower than market expectations of 0.3%, due to a decline in the cost of transport and lower increase in restaurant and hotel prices. Meanwhile, core inflation, which excludes administered and volatile price items, moderated from 0.5% yoy in April to 0.4% in May. The cost of transport declined by 2.5% yoy in May, remaining in negative territory since November 2018, but the magnitude of decline has gradually decreased. This was partly reflected by the government’s capping of the domestic retail fuel price of RON95 at RM2.08/litre since the last February from RM2.20/litre.

Inflationary pressure in May was reflected in the increase in the price of food and non-alcoholic beverages, alcoholic beverages and tobacco, and cost of furnishing and household equipment. Higher food prices were due partly to the month of Ramadan in May. However, prices of clothing and footwear, health, communication, recreation and culture and miscellaneous goods and services contracted in May. On a month-on-month basis, inflation rose by 0.2% in May compared to flat growth in April. In the first five months of 2019, the headline inflation CPI remained at a negative rate of 0.1% yoy as compared to +1.7% in the corresponding period of last year.

Partment of Statistics (DoS)

For June, the continued decline in the cost of transport will likely cushion the impact of higher food prices; we expect the Eid al-Fitr festival celebration to have put some pressure on overall prices. Going forward, while the domestic retail fuel prices will continue to be a drag on the cost of transportation, it is likely to trend higher, when the capping of the domestic retail price of RON95 is removed after the implementation of a possible fuel target subsidy that is expected from early July 2019. We also believe the country’s inflation will be slightly higher in the coming months, given the lower base last year after the 3-month zero-GST period from June to August, before the government imposed the Sales and Services Tax (SST) in September. We believe the price impact from these factors will be manageable, and full-year inflation should stay within the range of 1.2-1.3% in 2019 (1.0% in 2018). Monetary policy is likely to remain accommodative; BNM will likely leave its overnight policy rate (OPR) unchanged at 3.0% at the MPC meeting on 9 July 2019 and possibly throughout the year, in our view, after the last 25bps cut at the meeting in May.

Source: Affin Hwang Research - 27 Jun 2019