Rising Inflation Led by a Sharp Turnaround in Transport Cost

Malaysia’s headline inflation increased by 1.6% yoy in January from 1% in December, its fastest rate since May 2018, partly due to the low-base effect, as cost of transport recorded sharp negative growth in the corresponding period last year. Core inflation, which excludes administered and volatile price items, rose to 1.7% yoy in January from 1.4% in December. Cost of transport rose sharply by 3.9% yoy in January from -1.9% in December, its first positive growth since October 2018. In January 2020, the price of RON95 was higher at RM2.08/litre compared to an average of RM1.98/litre in January 2019. RON95 was previously capped at RM2.20/litre between March and December 2018 which had contributed to the high-base effect in the previous months. The increase in inflation was also due to higher cost of recreation and culture, from 0.6% yoy in December to 0.9% in January. Meanwhile, cost of housing, water, electricity and gas and other fuels (+1.7%), health (+1.4%), communication (+1.5%), education (+1.7%) and restaurant and hotels (+1.1%) remained stable in January. Prices of food and non-alcoholic beverages improved to 0.9% yoy from 1.7% in December. In contrast, the cost of clothing and footwear fell by 1.2% yoy, from -1% in December.

We believe headline inflation will experience some upward pressure in February due to the low-base effect (cost of RON95 in February 2019 averaged RM1.99/litre). However, due to the postponement in the implementation of the targeted fuel-subsidy programme, the ongoing cap on retail-fuel prices for RON95 and Diesel which began at the end of February 2019 will likely keep transport costs steady in the coming months. For the full-year 2020, we expect headline inflation to average around 1.8-2.0% compared to 0.7% in 2019.

As for monetary policy, despite the slightly higher inflation trend, we believe that the near-term economic outlook will be weighed down by the Covid-19 outbreak on the country’s tourism-related sectors as well as the manufacturing sector (ie, from disruptions within the global supply chain). We expect Malaysia’s GDP growth to expand by 4.0% projected for 2020 (revised from earlier forecast of 4.5%), below the current official forecast of 4.8%. We believe BNM may cut its Overnight Policy Rate (OPR) further by another 25bps from 2.75% to 2.5% in its upcoming March MPC meeting in order to support domestic economic growth. The Malaysia Government plans to roll out a fiscal stimulus package on 27 February 2020.

Source: Affin Hwang Research - 24 Feb 2020