● Headline inflation fell more than expected by -2.9% YoY in April from -0.2% YoY in March, much weaker than consensus median and house forecast (consensus: -1.6%; KIBB estimate: -1.7%)

- Largely attributable to a sharp drop in retail fuel prices, lower electricity bill and continuous weakness in underlying price pressure, reflecting significant demand destruction caused by the full impact of Movement Control Order (MCO) in April.

- MoM: worst drop since records begin (-2.7%; Mar: -1.2%).

- Core inflation: remained in positive territory and unchanged since February 2020 (1.3%).

● Consumer price declinedfurther due to a big fall in fuel price and lower electricity bill

- Transport (-21.5%; Mar: -8.9%): fell sharply on rock bottom fuel prices (RON95: -38.7% YoY; Mar: -16.2%).

- Housing, water, electricity, gas & other fuels (-2.2%; Mar: 1.6%): fell to an all-time low due to electricity bill discounts given to all consumers as part of the economic stimulus package.

● Weaker inflationary pressure across most advanced and developing economies

- Eurozone (0.4%): lowest since September 2016 due to oil price shock effect, as Brent crude oil price continue its freefallfrom -49.7% YoY in March to -62.8% YoY in April and utility inflation due to the decline in Ofgem’s price cap.

- US (0.3%): dropped by the most since the Great Recession as Washington announced stay-at-home order.

- Thailand (-3.0%): decline sharply due to lower fuel prices and plunge in fruit and vegetable prices.

● 2020 CPI forecast revised down to-0.7% from-0.5% (2019: 0.7%) on the backofthedeflationary environment created by the COVID-19 pandemic

- Considering that Malaysia economy was put in a straitjacket since March 18th, we expect the headline inflation to turn negative over the coming months, dragging the 2020 CPI deeper into deflation. The extension of the Conditional MCO to June 9th is expected to severely impact private spending due to deterioration in consumer confidence as unemployment surges and uncertainty is pervasive. On the other hand, the reopening of global economy is expected to partially boost the retail fuel prices on the back of improving demand. In the near term, policy actions are unlikely to trigger a wave of spending once the economy resumesas normal as elevated uncertainty surrounding the job market and possibility of a second wave of infections will persist.

- While BNM has cut the overnight policy rate (OPR) by a total 100 bps thus far this year, we believe that BNM still has ample room to ease the monetary policy as both domestic and global economy is progressing towards a growth recession in the 2Q20, along with a deflationary price pressure. Therefore, we expect BNM to slash the OPR by at least 25 bps at the next Monetary Policy Committee meeting in July.

Source: Kenanga Research - 21 May 2020