OVERVIEW

● Headline inflation growth was sustained at 0.2% YoY for the third straight month in May, registering below consensus and house estimate of 0.3% and 0.5%, respectively. On a MoM basis, the index rose by 0.2%, after charting a flat growth in the preceding month. Meanwhile, the core inflation eased marginally to 0.4% YoY (Apr: 0.5%), indicating a persistent lacklustre price pressure, attributable to the low price ceiling imposed on domestic fuel prices, adjustment in the retail oil pricing mechanism at the beginning of the year, as well as the overall moderation in economic activity.

● Higher growth in food prices and softer drop in transport prices were zeroed out by slower growth in prices of housing, water, electricity, gas & other fuels, as well as restaurant & hotel. The food index rose by 1.2% YoY (Apr: 1.1%), its fastest pace in seven months, in spite of the enforcement of the 30-day Festive Season Price Control Scheme on 27 types of goods which began on 21 May up until 19 June, in conjunction with the Eid celebration. Additionally, the decline in transport index has receded further to 2.5% (Apr: -2.6%), as RON-97 prices trended up (11.0%; Apr: 9.5%), while RON-95 prices retained a contraction of 5.5%. This mirrored the average Brent crude oil price in May at USD71.17/barrel (Apr: USD71.23) which edged lower after picking up for the past four successive months, owing to the unfavourable development surrounding the US-China trade negotiation. The aforementioned factors were equally outpaced by a slower growth in housing, water, electricity, gas & other fuels index (1.8%; Apr: 2.0%), triggered by a high base effect, as well as a decrease in restaurant & hotel index (0.6%; Apr: 0.8%), in line with our expectation for less travelling activities during the fasting month. We expect the inflationary pressure to gradually firm up in the near term, particularly as the exacerbated geopolitical tension arising from the US-Iran conflict inflicts concerns on the supply of oil, exerting upward pressure on global oil prices.

● Most advanced economies faced softer inflationary pressure, while developing economies experienced otherwise. US inflation inched down as cheaper gasoline outpaced a rebound in the cost of food, reinforcing the case for a rate cut this year, in line with an increasingly dovish signal sent by the Fed following its June FOMC meeting. Similarly, inflation in the Eurozone languished further below the European Central Banks’s (ECB) 2.0% inflation target, due mainly to a slowdown in cost of energy and services. Meanwhile, China experienced a 15-month high inflation as the African swine fever epidemic continued to exert upward pressure on pork prices. Indonesia also observed a rise in inflation, underpinned by higher food and transport prices amid the Ramadan festivities.

● Overall for this year, we foresee that the targeted fuel subsidy mechanism and floating of domestic fuel prices, contingent on whether or not it goes on as scheduled in July, coupled with low base effect arising from the changes in consumption tax to technically lift up inflation in the 2H19. However, any upside would be limited mostly due to elevated risks emanating from the external front, namely the slowdown in global growth and the escalating disputes between China, the US and Iran. Domestic activity will likely be hampered, as these factors seep into the domestic front, with the trade and investment sectors expected to be impacted the most. Against this backdrop, we are revising our CPI forecast to 0.7% from a range of 1.0-1.5% in 2019 (2018: 1.0%), providing the BNM more room to cut the overnight policy rate if need be after slashing it by 25 basis points to 3.00% in May. A further deterioration in the global economic environment along with a clear signal from Fed of more than one rate cut this year would justify BNM to reduce the OPR by another 25 bps.

Source: Kenanga Research - 27 Jun 2019