OVERVIEW

● Headline inflation recorded a marginal rebound of 0.2% YoY in March, after declining for the past two straight months (Feb: -0.4% and Jan: -0.7%), a tad below the consensus and house estimate of 0.3% and 0.5%, respectively. On a MoM basis, the index sustained a growth of 0.2%. Tracking a similar path, the core inflation rose by 0.5% YoY, above the rate observed in the preceding month (Feb: 0.3%). Overall for the first quarter, the inflationary pressure remained muted, with the index down by 0.3% YoY (4Q18: +0.3%), reflective of the changes in retail oil pricing mechanism at the start of 2019, as well as the lack of demand-pull pressure.

● Higher food prices and softer drop in transport prices mainly attributed to the turnaround in the overall CPI. The food index rose by 1.1% YoY (Feb: 1.0%), its fastest pace in four months. Additionally, the decline in transport index has receded further to 3.0% (Feb: -6.8%), as RON- 95 prices fell by less (-5.4%; Feb: 12.1%) and RON-97 and diesel prices trended up, growing by 1.9% (Feb: - 9.6%) and 0.3% (Feb: -2.8%), respectively. This mirrored the average Brent crude oil price (March USD66.14/barrel; Feb: USD63.96) which rallied to its highest in five months on the back of reports on steeper production cuts by Saudi Arabia and shutdown of Venezuela’s oil-exporting terminal amid a major power outage. In the next few months, we expect inflationary pressure will gradually pick up, driven by firmer global oil prices, especially following the announcement of the US’s decision to terminate sanction waivers for major importers of Iranian oil effective 2nd May.

● Headline inflation picked up across most advanced and developing economies on high energy prices, but underlying price pressure remained tame. US inflation accelerated to 1.9%, propelled by rising energy and food prices, masking a slowdown in its core index, which charted the smallest gain in 13 months (2.0%), and hence justifying Fed’s decision to put rate hikes on hold. Similarly, core inflation slowed further to 1.0% in the Eurozone, remaining well below European Central Banks’s (ECB) 2.0% inflation target. Within Asia, China experienced a 5-month high inflation, mainly due to heightened pork prices as farmers increased slaughtering of pigs to stem the spread of swine virus.

● Overall for this year, we foresee that the floating of domestic fuel prices, slated for July, and low base effect arising from the tax holiday period from June to August 2018 to technically lift up YoY inflation in the 2H19. However, we expect any upside would be limited largely due to heightened risks emanating from the external front, namely the slowdown in global growth and the ongoing trade dispute amongst China, the US, and potentially the EU. These may spillover to the domestic front, seeping through as a hindrance to economic activity. Against this backdrop, we believe that inflation would likely hit the lower end of our forecast range of 1.0-1.5% in 2019 (2018: 1.0%). As such, coupled with dovish stance of major central banks (i.e. Fed and ECB) and a growing number of regional central banks, we believe that the Bank Negara Malaysia now has a bigger leeway to cut its overnight policy rate by 25 basis points, possibly at its next Monetary Policy Committee meeting on 7 May.

Source: Kenanga Research - 25 Apr 2019