Low Global Oil Prices Set to Weigh on Inflation in the Coming Months

Malaysia’s headline inflation improved to 1.3% yoy in February from 1.6% in January, as the lower inflation was partly due to the low-base effect from the sustained decline in cost of transport in February 2019. Core inflation, which excludes administered and volatile price items, also eased to 1.3% yoy in February from 1.6% in January. However, costs of alcoholic beverages increased slightly to 0.2% yoy in February compared to 0.1% in January. Costs of transport improved sharply to 2.4% yoy in February from 3.9% in January, but remained in positive growth territory for a second consecutive month. In February 2020, the average price of RON95 was higher at RM2.07/litre compared to an average of RM1.99/litre in February 2019. Lower inflation was reflected in a lower rise in cost of food and non alcoholic beverages (+0.8% yoy), housing and utilities (+1.6%), furnishing (+1%), health (+1.3%), recreation and culture (+0.7%) and education (+1.3%). Meanwhile, cost of communication (+1.5%), restaurant and hotels (+1.1%) and miscellaneous goods and services (+2.5%) were steady during the month.

In the first two months of 2020, headline inflation averaged 1.5% compared to -0.5% in the same period last year. In the coming months, if low global oil prices persist, we believe headline inflation will be weighed down by lower transport costs. So far in March 2020, the price of domestic retail petrol RON95 has been lowered three times to a low of RM1.44/litre (from RM2.08/litre since beginning of March), while the price of diesel was also reduced three times to RM1.75/litre (from RM2.13/litre in the beginning of March). In 2H20, we believe the recovery in global oil prices will remain weak due to lower global oil demand. Domestically, in the near term, despite the uncertainty in economic environment from the impact of Covid-19, we believe both cost-push and demand-pull factors on inflation will remain manageable. There are no major disruptions or shortages in production and supply of food products, with food prices remaining stable.

Going forward, in view of lower cost of transport, reflecting lower domestic retail petrol prices, and a slowing economy, we are revising lower our headline inflation to average around 1.2-1.4% for 2020 from our earlier estimate of 1.8-2.0% (0.7% in 2019). In terms of monetary policy, with inflationary pressure remaining under control, we believe BNM may lower its Overnight Policy Rate (OPR) further by another 25bps at its May MPC meeting to 2.25%, due to the negative impact of Covid-19 outbreak and the potential downside of low global oil prices on the domestic economy.

Source: Affin Hwang Research - 26 Mar 2020