● Headline inflation held steady, matching house expectation but a tad above consensus (1.1% YoY; consensus: 1.0%; KIBB forecast: 1.1%; Sep: 1.1%)

• Mainly attributed to the government policy measures: low price ceiling imposed on domestic fuel price (RON95) and the lapse in the impact of consumption tax policy.
• MoM: slight pick up (0.2%; Sep: 0.0%).
• YTD: moderated to 0.6% YoY (Jan-Oct 2018: 1.1%)
• Core inflation: edged down to lowest in 5 months (1.4%; Sep: 1.5%).

● The October's inflation growth was led by the moderation in the index of food & non-alcoholic beverages, alcoholic beverages & tobacco, and miscellaneous goods & services, but dragged down by a sharp drop in the transport index

• Food & non-alcoholic beverages (1.8%; Sep: 2.2%), alcoholic beverages & tobacco (2.2%; Sep: 2.4%) and miscellaneous goods & services (2.2%; Sep: 2.7%) moderated on the absence of demand pressure.
• The transport index (-2.3%; Sep: -2.2%) fell on lower fuel prices (RON95: RM2.08/litre vs RM2.20/litre in October 2018) following adjustment in the retail oil pricing mechanism since the beginning of the year.

● Mix inflation trend across most advanced and developing economies

• Eurozone (0.7%): Inflation moderated but in line with market expectation due to lower oil prices and food.
• Thailand (0.1%): Hits over 2-year low in October due to falling prices of non-core goods.
• South Korea (0.0%): Inflation turned to zero in October after two months in negative territory largely due to subdued oil prices amid weak domestic demand and slower global economy.
• China (3.8%): Soars to 8-year high, fuelled by the surge in pork price, amid a slowing domestic economy.

● 2019 CPI forecast maintained at 0.7% (YTD: 0.6%; 2018: 1.0%)

• We expect inflation to pick up within a range of 1.0% to 1.5% in the remaining two months of the year on the back of lower base effect (Nov & Dec 2018: 0.2% YoY respectively) and the festive season factor before edging up above 2.0% in 2020. Base effects, the floating of fuel prices beginning in January next year, and planned nationwide upward adjustment in water tarrifs are key factors that would lift up inflation in 2020.
• The expectation of rising inflation is a cost push factor and it would definitely not encumber BNM to decide to resume on cutting interest rate after a decision to pause in November, leaving the overnight policy rate to settle at 3.00% in 2019, but announcing SRR cut a few days later. We reckon that the central bank may decide to cut policy rates as soon as early 1Q20 due to the underlying weakening growth trend as evident in the weak 3Q19 GDP growth outcome.

Source: Kenanga Research - 21 Nov 2019