● Headline inflation fell to a five-month low in November (-1.7%; Oct: -1.5%), below expectation (KIBB: -1.3%; consensus: - 1.5%)

- Deflation widened as consumer activities were hindered by the interstate travel restrictions from Oct 14th to Dec 6th and the ongoing Conditional Movement Control Order (CMCO) in high-risk states.

- MoM: declined for the first time in seven months (-0.2%; Oct: 0.1%).

- Core inflation: eased to an 18-month low (0.7%; Oct: 0.8%).

● Steeper deflation was attributable to a weaker transport costs and housing, water, electricity, gas & fuel prices

- Transport (-11.1%; Oct: -10.2%): growth contraction worsened to a five-month low on cheaper retail fuel prices (RON95: - 21.6% YoY, Oct: -19.5%), reflecting limited domestic mobility and in contrast with the rising global crude oil prices (-23.8% YoY to USD 47.6/bbl; Oct: -37.8% to USD37.5/bbl).

- Housing, water, electricity, gas & other fuels (-3.3%; Oct: -3.0%): edged down to a fresh record low on the back of continued electricity bill discounts and a higher base in the preceding year.

● Mixed inflation growth across advanced and developing economies

- Japan (-0.9%): prices dropped at its fastest pace in a decade, due to weak energy prices and the government’s travel discount scheme.

- China (-0.5%): inflation dropped into negative territory for the first time in 11 years as pork prices fell significantly.

- Indonesia (1.6%): rose to a five-month high, as the rainy season disrupted the supply of goods and services.

● 2020 CPI is expected to register slightly below our initial forecast of -1.0% (YTD: -1.1%; 2019: 0.7%); it is projected to rebound but relatively benign at 1.7% in 2021

- The continued pandemic-related restrictions will likely sustain deflationary pressure in the coming months. However, we expect MoM inflation to pick up slightly in December on festive demand and following the lifting of interstate travel ban on Dec 7th. The recovery in global crude oil prices is also expected to contribute to the uptrend. With the expectation of an economic growth recovery, we forecast the rate of inflation to turnaround but remain relatively benign at 1.7% in 2021.

- With the onset of positive vaccine sentiment and improving economic conditions we see a higher probability that the Bank Negara Malaysia (BNM) will keep the overnight policy rate (OPR) unchanged at 1.75% at the next Monetary Policy Committee meeting. Nevertheless, risks remain tilted to the downside due to the continued surge in COVID-19 cases locally

Source: Kenanga Research - 24 Dec 2020