● Headline inflation growth accelerated to a 20-month high of 1.6% YoY in January from 1.0% in December, matching house estimate but a tad lower than market expectation (consensus: 1.7%; KIBB estimate: 1.6%)

- The higher inflation growth was largely attributable to a low base effect, arising from the 7.8% YoY drop (-5.5% MoM) in the CPI's transport component in January 2019 due to cheaper fuel price. Excluding this factor, the underlying price pressure remained weak, attributable to slower economic growth outlook, with downside risks arising from the impact of COVID-19 outbreak and weak external sector.

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

- Core inflation: edged up to highest in 5 months, matching headline inflation (1.6%; Dec: 1.4%).

● Higher growth in prices led by the index of transport followed by miscellaneous goods & services

- Transport: propelled to a 18-month high (3.7%; Dec: -1.9%), triggered by higher fuel prices and surges in demand for air travel due to CNY.

- Miscellaneous goods & services inched up marginally (2.5%; Dec: 2.4%) and housing, water, electricity, gas & other (1.7%; Dec: 1.7%) and education (1.7%; Dec: 1.7%) remained stable.

- Food & non-alcoholic beverages dipped to 13-month low (0.9%; Dec: 1.7%) due to CNY price control scheme.

● Rising inflationary pressure across most advanced and developing economies

- Eurozone: third straight month of expansion (1.4%)but remained below the ECB target range of 2.0%.

- USA: biggest gain (2.5%) since October 2018 due to increase in rents and clothing prices.

- China: reached a 8-year high (5.4%) driven by the impact of Lunar New Year holiday and the COVID-19 epidemic.

● 2020 CPI forecast between 1.0% to 1.5% (2019: 0.7%)

- The COVID-19 outbreak in China as well as weaker growth on the external front, will adversely impact the domestic economy in the upcoming months in spite of higher domestic demand led by private and public consumption.

- Inflationary pressure is expected to stay modest in 2020 (1.0-1.5%; 2019: 0.7%) in the absence of demand-pull factor amid slowing growth momentum. The announcement on economic stimulus package later this week (Feb 27) is expected to cushion the impact of COVID-19 and help to support growth. The house expects BNM to slash the overnight policy rate (OPR) by another 25 basis points at the next Monetary Policy Committee (MPC) meeting (Mar 3), bringing the OPR to settle at 2.50%.

Source: Kenanga Research - 24 Feb 2020