• Inflation contracted in December due to declines in costs of transport, housing & utilities, furnishing & household equipment, hotels & restaurants and prices of clothing & footwear
   
• Core inflation, which excludes administered and volatile price items, remained unchanged at 0.7% yoy in December
   
• We expect higher global oil prices and improvement in economic activity to put gradual upward inflationary pressure in 2021

Inflation Contracted by 1.2% Yoy for Full-year 2020 (0.7% in 2019)

Malaysia’s headline inflation contracted by 1.4% yoy in December, albeit a smaller decline than -1.7% in November. The country’s inflation rate has been in negative territory for the tenth consecutive month since March 2020. The continued contraction in inflation was attributed mainly to declines in costs of transport, furnishing and household equipment and housing & utilities, restaurants and hotels as well as prices of clothing and footwear during the month. Core inflation, which excludes administered and volatile price items, remained unchanged at 0.7% yoy in December. Costs of transport contracted by 8.4% yoy in December (-11.0% in November), due to the lower domestic retail petrol price of RON95, which averaged RM1.74/litre in December as compared to RM2.08/litre in December 2019. Costs of housing and utilities contracted by 3.3% yoy in December, partly due to ongoing electricity discounts. Prices of food and non-alcoholic beverages remained stable at 1.4% yoy in December, the same rate of increase as in November. However, prices of alcoholic beverages and tobacco, recreation, services and culture showed slight positive increases in December. For the full year 2020, the country’s headline inflation rate contracted by 1.2% yoy compared to +0.7% in the corresponding period last year, due mainly to the decline in costs of transport, attributed to the high base of domestic retail petrol prices in the previous year. Domestic retail fuel price of RON95 was capped at RM2.08/litre throughout 4Q19 compared to RM1.80/litre as at end December 2020. The electricity discount, as part of the fiscal stimulus measures, which was extended until December 2020, also placed some downward pressure on inflation.

Going into 2021, we expect higher global oil prices and improvement in economic activity to put gradual upward inflationary pressure. We are projecting the country’s headline inflation to average around 2%, as compared to the official forecast of between 1% and 3%, depending on global oil and commodity price developments. Bank Negara Malaysia (BNM) kept its overnight policy rate (OPR) unchanged at 1.75% for the third consecutive Monetary Policy Committee (MPC) meeting. However, with the whole country under stricter MCO measure (from the CMCO) except for Sarawak, we believe any decision by BNM on OPR direction (i.e. on possible further cuts) in future MPC meetings in 2021 will depend on the duration of enforcement of the MCO and its impact on the economy from containment measures. While BNM may adopt a wait-and-see approach, we believe OPR will likely remain stable at 1.75% throughout this year, in view of the introduction of stimulus packages, recovery in global demand, turnaround in public and private sector expenditure as well as possible roll-out of vaccines in the coming months.

Source: Affin Hwang Research - 25 Jan 2021