● Headline inflation turned negative in March, its first deflation in 13 months andbroadlycloser to consensus and house forecast (-0.2% YoY; consensus: -0.1%; KIBB estimate: -0.3%; Feb: 1.3%)

- Attributable to a cheaper fuel price and persistent weakness in underlying price pressure, reflecting suppressed demand conditions due to the Movement Control Order (MCO) arising from the impact of COVID-19 pandemic.

- MoM: fell sharply on weak inflationary pressure, lowest in 21- month (-1.2%; Feb: 0.0%).

- 1Q20: moderated slightly despite low base effects (0.9%, 4Q19: 1.0%)

- Core inflation: remained unchanged since February (1.3%).

● Weak prices predominantly attributable to the indices of transport but supported by higher food & non-alcoholic beverages

- Transport (-8.9%; Feb: 2.4%): fell sharply on cheaper retail fuel prices (RON95: -16.2% YoY; Feb: 4.0%).

- Food & non-alcoholic beverages (1.2%; Feb: 0.8%): surprisingly expanded driven by food at home(0.9%; Feb: 0.2%), while food away from home unchanged (1.6%).

● Subdued inflationary pressure across most advanced and developing economies

- Eurozone (0.7%): eased to a four-month low on falling energy cost due to decline in Brent crude oil price ( -51.6% YoY to USD32/barrel; Feb: -12.9% to USD 55.7).

- US (1.5%): moderated sharply on weak energy prices, reflecting the fall in oil prices and the impact of COVID-19.

- China (4.3%): slowed on weak food prices in spite of a surged in pork prices.

● 2020 CPI forecast revised down to -0.5% from 0.5-1.0% (2019: 0.7%) incorporating the impact of COVID-19 and oil price crash

- The Movement Control Order (MCO) which begins from March 18th and extended to April 28th is expected to severely impact private spending, with both firms and households to behave cautiously on spending. Meanwhile, the collapse of crude oil prices on flagging demand due to lockdown and travel restriction imposed globally to further weigh on retail fuel prices. While this would further contribute to a benign inflationary trend it may be supported by various policy measures and the low base effect.

- Though we see ample room for BNM to embark on a rate cut, the probability of doing so is less now, given the aggressive monetary easing earlier this year, as well as the large government fiscal stimulus package to support the economy. Perhaps BNM may want to first observe how well these aggressive monetary and fiscal measures work out and save some bullets should the crisis worsen and prolonged.

Source: Kenanga Research - 23 Apr 2020