Below expectations – Malaysia’s headline inflation and core inflation (which excludes administered and high price fluctuation) registered the same growth as the previous month of +0.2% y-o-y (vs Mar’19: +0.2% y-o-y) and +0.5% y-o-y (vs Mar’19: +0.5% y-o-y) respectively in Apr’19. Headline inflation result was marginally behind our in-house and market expectations of +0.6% y-o-y and +0.4% y-o-y respectively. The minimal CPI growth during this month was due to moderate growth among the subsectors.

Deflation in Transport narrowed again – Cost of transport which consists of 14.6% from total CPI basket reduced it contraction to -2.6% y-o-y in Apr’19 from -3.0% y-o-y in Mar’19. However, transport index on monthly basis eased to +0.2% m-o-m from +2.6% m-o-m in prior month due to lower retail fuel price. Overall, average monthly fuel price in Apr’19 for RON 95 was RM1.66 (vs Mar’19: RM1.73; Mar’18: RM2.20), RON 97 was RM2.18 (vs Mar’19: RM2.11; Mar’18: RM2.47), and Diesel was RM1.74 (vs Mar’19: RM1.82; Mar’18: RM2.18). We believe Transport index could increase going forward following arising pressure from targeted fuel subsidy as Government’s decision to remove the price cap of RON95, once implemented (probably in the second half of 2019).

Soothing other key CPI components – Some of the key CPI components showed the same growth as the prior month such as Housing, water, electricity, gas & other fuels: +2.0% y-o-y (vs Mar’19: +2.0%) and Food & Non-Alcoholic beverages: +1.1% y-o-y (vs Mar’19: +1.0%). Food inflation was lifted by food sub-group indices such as Fish & Seafood: +0.2% y-o-y (vs Mar’19: +0.1%), Fruits: +0.1% y-o-y (vs Mar’19: -0.2%) and Vegetables: +2.2% y-o-y (vs Mar’19: -0.2%). However, most of the food sub-group indices’ growths were easing which led to food inflation growth run-of the mill - Rice bread & other cereals: -0.4% y-o-y (vs Mar’19: -0.2%), Meat: -3.6% y-o-y (vs Mar’19: -1.1%), Milk & Eggs: : +1.9% y-o-y (vs Mar’19: +2.0%), Oil & Fats: -1.0% y-o-y (vs Mar’19: -0.8%), and Food products n.e.c: -0.5% y-o-y (vs Mar’19: -0.5%). Meanwhile, Alcoholic beverages & tobacco was little change, +1.2% y-o-y from +1.1% yo-y from last month. However, other key CPI components eased marginally such as Clothing & footwear: - 0.1% y-o-y (vs Mar’19: -3.0%), Furnishing, household equipment & routine household maintenance: - +0.2% y-o-y (vs Mar’19: +0.3%), Health: -0.3% y-o-y (vs Mar’19: -0.2%), Communication: -1.1% y-o-y (vs Mar’19: -1.1%), Recreation services & culture: -0.5% y-o-y (vs Mar’19: -0.5%), Education: +1.3% y-oy (vs Mar’19: +1.2%) and Restaurants & hotels: +0.8% y-o-y (vs Mar’19: +1.0%)

Four states surpassed national CPI – National CPI in Apr’19 was same as previous National CPI of +0.2% (vs Mar’19: +0.2%). Four states that surpassed the national CPI were Wilayah Persekutuan Kuala Lumpur (+0.7%), Negeri Sembilan (+0.5%) and Selangor & Wilayah Persekutuan Putrajaya (+0.4%). Overall, we reckon that inflation rates across states are still manageable amid current resilient economic condition.

Another soft growth in May’19 inflation – We opine that inflation in May’19 to pick up slightly as the index was affected by food hike during the fasting month and pre-Hari Raya celebration. However, we believe that contribution from Transport index will slightly reduce following lower retail fuel price as price of RON97 dropped during that month. Overall, we opine that 2019 inflation will increase modestly, underpinned by mild inflationary pressure from floating domestic fuel price starting 2H19 (only limit to selected group of people, i.e. low-and-middle income group) and impact of low base effect arising from the tax holiday period in June’18 to Aug’18. Besides, slower global economic growth coupled with flat crude oil prices would dampen our inflation growth. As such, we maintain our headline inflation forecast for 2019 of +1.5% y-o-y (vs 2018: +1.0 y-o-y). On the other hand, we have seen the recent announcement by Bank Negara Malaysia (BNM) on Overnight Policy Rate (OPR) cut of 25bps to 3.0% after leaving the policy rate unchanged since its last 25bps rate hike in Jan’18. The reason behind the rate cut was due to rising downside risks to economic growth as impacted by external headwind and domestic environment, trade tensions and weakness in commodity-related sectors. Moving forward, BNM likely to keep its OPR unchanged at 3.0% for the whole year of 2019.

Source: JF Apex Securities Research - 27 May 2019