Inflation Improved to 0.7% Yoy in 2019 From 1.0% in 2018

Malaysia’s headline inflation rose by 1.0% yoy in December from 0.9% in November, in line with market expectations. However, core inflation, which excludes administered and volatile price items, was unchanged at 1.4% for the third consecutive month. Headline inflation trended higher in December due to higher cost of food and non-alcoholic beverages, which rose by 1.7% yoy in December from 1.5% in November. Apart from that, higher inflation was also seen in cost of education, which increased by 1.7% yoy in December following a 1.6% increase in November. Meanwhile, inflation rate for housing, water, electricity and gas and other fuels (+1.7%), health (+1.4%), communication (+1.5%), restaurant and hotels (+1.1%) in December remained unchanged at the same rate as in November. In contrast, cost of transport continued to decline for the fourteenth month in a row, contracting by 1.9% yoy in December after declining by 2.4% in November, partly due to the lower fixed fuel price of RON95, which remained at RM2.08/litre since March 2019, as compared to higher price in 2018. Likewise, the smaller decrease in cost of clothing and footwear were registered in December, as it declined by 1.0% in December from 1.1% in November. For the full year 2019, inflation improved to an average of 0.7% yoy after rising by 1.0% in 2018. This was reflected from the decline in cost of transport, which fell 3.1% yoy from an increase of 1.5% in 2018.

Moving into 2020, we anticipate the full-year headline inflation to average around 1.8-2.0% forecasted for 2020, higher than 0.7% in 2019, partly due to some cost-push inflation attributed by the likely removal of fuel price ceiling of RON95 and Diesel after the implementation of Fuel Subsidy Programme (FSP). Furthermore, the introduction of RM30 e-cash, Bantuan Sara Hidup, higher minimum wage in selected cities, Malaysia@work initiative, tax relief and other Government’s stimulus measure would support consumption spending and also place some demand-pull inflation in 2020. In the latest MPC meeting, BNM cut its Overnight Policy Rate (OPR) by 25bps to 2.75%, its lowest level since April 2011. BNM guided that its decision to lower the OPR was a “pre-emptive measure to secure the improving growth trajectory amid price stability”. We believe this may be a pre-emptive measure from the possible impact of the Wuhan pneumonia virus outbreak in order to contain its implications on economic activity, especially in the tourism and retail sectors. Therefore, unless the coronavirus outbreak worsens, we believe BNM will likely keep its OPR unchanged throughout 2020 as it guided that the current OPR level of 2.75% is appropriate in sustaining economic growth with price stability.

Source: Affin Hwang Research - 23 Jan 2020