OVERVIEW

● Headline inflation declined 0.7% YoY in January (Dec: 0.2%), registering below the consensus and house estimate of -0.2%, marking the first drop in consumer prices since the 2009 Global Financial Crisis. On a MoM basis, the index fell by 0.5% (Dec: +0.1%). Tracking a similar path, the core inflation eased to 0.2% YoY (Dec: 0.4%). The subdued inflationary pressure observed since August 2018 following the tax holiday period, was further amplified amid changes in retail oil pricing mechanism at the start of 2019.

● Lower transport prices outweighed rising food, and housing, utility and fuel prices. The food index rose 1.0% YoY (Dec: 0.7%), underpinned by higher prices of meat (2.4%) and food away from home (3.3%), reflecting heightened demand during the festive new year season. The housing, water, electricity, gas & other fuels index also experienced an increase of 2.0%, sustaining its pace of growth in the preceding month. Despite the increases mentioned above, the overall consumer prices declined mainly due to a significant drop in the transport index (- 7.8%; Dec: -2.0%), as retail oil prices fell to an average of RM1.98 for RON-95 (Jan-18: RM2.28), RM 2.28 (Jan-18: RM2.55) for RON-97 and RM 2.12 (Jan-18: RM2.31) for diesel. This was triggered by the reinstatement of the weekly managed float system on 5th January, as the government intends to allow consumers to immediately benefit from any downward movement of the global oil prices, whilst protecting them from higher prices by introducing a price ceiling of RM2.20/litre for RON-95 and RM2.18/litre for diesel. Additionally, a stronger Ringgit relative to the USD (Jan: RM4.12; Dec: RM4.17) and a high base effect also exerted downward pressure to the overall price index. Nevertheless, as the deflation was largely due to adjustment in pricing mechanism rather than softening demand, and as the average Brent crude oil price has recently gained strength (Jan: USD59.4/barrel, Dec: USD56.5/barrel) on the back of the ongoing OPEC’s supply cut, we foresee that the inflationary trend will gradually normalise.

● Moderating inflation in the advanced and developing economies amid low energy prices (Jan. average Brent crude oil price: -14.0% YoY). US inflation extended its slowdown to 1.6%, the smallest gain since mid-2017 on cheaper gasoline prices, supporting Fed’s dovish monetary policy stance. Driven by similar factor, inflationary pressure in the Eurozone and other regional economies, including China, Thailand and Indonesia also eased further. Of note, Bank of Indonesia’s recent diversion from hawkish monetary policy position may be partly reflective of Indonesia’s inflation level which has approached the lower end of its target range of 2.5-4.5%.

● Overall for this year, the floating of domestic fuel prices in 2Q19 and low base effect arising from the tax holiday period from June to August 2018 may technically lift up YoY inflation in the 2H19. However, we expect it would be limited by cooling global growth and the ongoing trade dispute, which may translate into slowdown in domestic activities and lower crude oil prices. Given the current backdrop, we maintain our expectation for a modest inflation growth within a range of 1.0-1.5% in 2019, with the Bank Negara Malaysia expected to hold the overnight policy rate steady at 3.25%. Nonetheless, in case of a sharp deterioration in domestic activity, we believe that the central bank has ample room to cut interest rates.

Source: Kenanga Research - 25 Feb 2019