• Headline inflation contracted for fourth consecutive month, weighed down by costs of transport and housing & utilities.
• Maintaining our projection of headline inflation to average around 0.1% for 2020 (0.7% in 2019).
• BNM will likely keep its overnight policy rate at 1.75% at the remaining two meetings on 10 Sept and 3 Nov unless the Covid-19 outbreak worsens.

Rising retail fuel prices to add some inflationary pressure in the coming months

Malaysia’s headline inflation contracted yoy for the fourth consecutive month to -1.9% in June from -2.9% in May. Headline inflation was weighed down by declines in costs of transport and housing, water, electricity, gas and other fuels. During the month, the cost of transport fell for the fourth month in a row albeit at a slower pace of -14.3% (-20.8% in May). This was reflected in the domestic retail petrol price of RON95, which averaged RM1.54/litre as compared to RM2.08/litre in June 2019. However, excluding fuel for vehicles (ie, domestic retail petrol prices), headline inflation was a positive 0.2% in June (0.1% in May). Core inflation, which excludes administered and volatile price items, rose to 1.2% yoy in June (1.1% in May). Headline inflation in June was also dampened by costs of housing and utilities, which declined for the third month in a row by 2.6% yoy in June (-2.6% in May), possibly due to the ongoing electricity discounts by the government. Besides that, costs of clothing and footwear (-1.1%) and furnishing (-0.2%) also fell during the month. Meanwhile, costs of alcoholic beverages and tobacco (+0.2%) and communications (+1.6%) remained stable in June, while costs of health (+1.1%), recreation services and culture (+0.6%), education (+0.8%) and restaurant and hotels (+0.3%), moderated. In contrast, prices of food and non-alcoholic beverages (+1.6%) and miscellaneous goods and services (+3.0%) rose during the month.

In the first half of 2020, the country’s headline inflation rate averaged -0.8% yoy compared to +0.2% in 1H19. In the months ahead, we believe headline inflation will be higher due to a slower decline in transport costs, which account for 14.6% of the CPI basket, amid higher retail fuel prices in line with rising global crude oil prices. Domestic retail fuel prices of RON95 and RON97 have risen to RM1.72/litre and RM2.02/litre respectively, from RM1.69/litre and RM1.99/litre respectively at the start of July. However, the higher base from the previous year, when the retail fuel price of RON95 was capped at RM2.08/litre, will continue to contribute to mild inflationary pressure in the coming months. In view of the short-term deflation risk, we are maintaining our projection for headline inflation to average +0.1% for 2020 (+0.7% in 2019). Nevertheless, with the gradual reopening of the economy during the Recovery Movement Control Order (RMCO) as well as lower interest rates, we believe some increase in consumer demand will also lead to some upward inflationary pressure. In terms of monetary policy, following the latest 25bps cut to the Overnight Policy Rate (OPR) to 1.75% at the July MPC meeting, we believe BNM will likely keep its overnight policy rate at the current level at the remaining two MPC meetings of the year on 10 September and 3 November, unless the Covid-19 outbreak worsens unexpectedly.

Source: Affin Hwang Research - 23 Jul 2020