• Inflation rose for a second straight month to 1.7% yoy in March (0.1% in February), after eleven months of contraction from March 2020 to January 2021, due mainly to a higher cost of transport
• Core inflation, which excludes administered and volatile price items, remained unchanged at 0.7% yoy for the fifth month in a row
• Headline inflation is projected to increase to between 2.5 and 3.0% in 2021 (-1.2% in 2020), in view of the expected sharp increase in 2Q21

Headline inflation averaged 0.5% yoy in the first three months of 2021

Malaysia’s headline inflation rose for a second straight month to 1.7% yoy in March (0.1% in February), after eleven months of contraction from March 2020 to January 2021. The increase in inflation was due mainly to a higher cost of transport, which turned around from -2.0% yoy in February to 9.8% in March, turning to positive growth for the first time since March 2020. Domestic retail petrol price of RON95 averaged at RM2.05/litre in March as compared to RM1.76/litre in March 2020. Apart from the higher cost of transport, other items in the CPI basket remained relatively stable during the month. Core inflation, which excludes administered and volatile price items, remained unchanged at 0.7% yoy in March for the fifth month in a row. Headline inflation, excluding fuel for vehicles (RON95, RON97 and diesel), rose slightly to 0.5% yoy in March from 0.4% yoy in February. Costs of furnishing and household equipment rose by 0.9% yoy in March, recreation services and culture by 0.5%, health by 0.5% and alcoholic beverages and tobacco by 1.5%, while costs of restaurants and hotels, and communication remained stable. Prices of housing and utilities (-0.8%) and clothing and footwear (-0.3%) continued to decline during the month.

In the first three months of 2021, headline inflation averaged 0.5% compared to 0.9% in the same period last year. However, in the months ahead, we believe inflation rate will trend higher, due to rising costs of transport attributed to the low base effect of domestic retail petrol prices in the corresponding period of last year. While the ceiling prices of RON 95 and diesel are now capped at RM2.05 per litre and RM2.15 per litre respectively, the retail petrol prices are still higher than the average of RM1.37/litre in 2Q20. Hence, we believe that the low base of domestic retail petrol prices last year will lead to higher headline inflation this year. We believe domestic food prices will trend slightly higher, with some volatility in price movement due to seasonal supply and demand conditions, as a result of the festive season in April and May 2021.

In view of the expected sharper increase in inflation in 2Q21, we are projecting the country’s headline inflation to average around 2.5 and 3.0% in 2021 (-1.2% in 2020), as compared to the official forecast of between 2.5% and 4%. On the monetary policy front, despite downside risks from ongoing uncertainties surrounding the Covid-19 pandemic and effectiveness of the vaccination programmes globally and domestically, we believe BNM will likely maintain its policy interest rate at 1.75% throughout 2021, after having cut the policy rate by a cumulative 125bps in 2020), as the stance of monetary policy remains appropriate and accommodative.

Source: Affin Hwang Research - 26 Apr 2021