● Headline inflation eased to a six-month low in November, below expectation (0.9% YoY;consensus: 1.2%; KIBB forecast: 1.2%; Oct: 1.1%)

- Attributable to the lapse in the impact of consumption tax policy, low price ceiling imposed on domestic fuel prices,lingering impact of adjustment in the retail oil pricing mechanism at the beginning of the year, as well as lacklustre demand-pull pressure.

- MoM: softened marginally (0.1%; Oct: 0.2%).

- Core inflation: sustained at a five-month low (1.4%; Oct: 1.4%).

● Softer growth in prices led by the indices of food & non-alcoholic beverages, alcoholic beverages & tobacco and transport

- Food & non-alcoholic beverages (1.5%; Oct: 1.8%): moderated on lower growth in prices of food away from home (2.2%; Oct: 2.9%), reflecting cautious consumer spending.

- Alcoholic beverages & tobacco (0.4%; Oct: 2.2%): spiralled to a 13-month low on high base effect arising from the increase in retail prices of cigarettes last year in adhering to the Control of Tobacco Product Regulations 2004, which requires prices of tobacco products to be raised by a minimum of RM0.40 per pack after the implementation of the SST.

- Transport (-2.4%; Oct: -2.3%): fell on steeper contraction in fuel prices, specifically for RON97 (-6.7% YoY; Oct: -4.8%).

● Rising inflationary pressure across most advanced and developing economies

- Eurozone (1.0%): rebounded after two straight months of contraction, led by higher cost of services.

- Thailand (0.2%): edged marginally higher on softer decline in domestic fuel prices.

- China (4.5%): accelerated to near 8-year high as the outbreak of the African swine fever since August 2018 continued to disrupt local pork supply, causing a surge in pork prices.

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

- Inflation to pick up slightly in the final month of 2019 lifted by festive purchases, bringing full year average to our 0.7% forecast.

- 2020: prices to average higher (1.0-1.5%) reflecting the gradual floating of fuel prices in January, planned nationwide upward adjustment in water tariffs and low base effects.

- The expectation of a rising inflation is a cost push factor and it would not encumber BNM to resume its monetary easing. Coupled with the soft growth momentum as evidenced by recent slew of weak economic indicators (e.g. exports, distributive trade sales, industrial production), we reckon that the BNM may decide to slash the Overnight Policy Rate by 25 basis points to 2.75% as soon as early 1Q20.

Source: Kenanga Research - 23 Dec 2019