● Headline inflation remain in the deflationary zone for the tenth straight month in December, albeit moderated at -1.4% (Nov: - 1.7%), but below expectation (KIBB: -1.1%; consensus: -1.3%)

- In 2020, the average headline CPI fell 1.2% (2019: 0.7%) while the average core CPI rose 1.1% (2019: 1.1%).

- Malaysia post a full-year deflation for the first time in 51 years amid the COVID-19-induced economic downturn that weighed heavily on domestic demand. The deflation was also attributable to government’s COVID-19 measures, weak energy prices and electricity bill discounts.

- MoM: rebounded to a five-month high (0.5%; Nov: -0.2%).

- 4Q20: fell at a slightly higher rate (-1.5%; 3Q20: -1.4%).

- Core inflation: remained unchanged at its lowest level since May 2019 (0.7%; Nov: 0.7%).

● Smaller drop in fuel prices was partially offset by higher food prices

- Transport (-8.4%; Nov: -11.1%): smallest contraction since the start of the oil price war in March (RON95: -16.3% YoY, Nov: -21.6%), in tandem with the rising Brent crude oil price (-21.5% YoY to USD 51.8/bbl; Nov: -23.8% to USD47.6/bbl).

- Food and non-alcoholic beverage (1.4%; Nov: 1.4%): increased at the same level as last month despite high base effect, driven by higher food at home (1.3%; Nov: 1.2%).

● Mixed inflation trend across advanced and developing economies

- Japan (-1.2%): slumped at the fastest pace since April 2010, mainly due to lower energy prices and the government’s travel subsidy campaign.

- China (0.2%): recovered after dropping into deflation in November, as consumer demand increased ahead of the Lunar New Year Festival.

- US (1.4%): rose to a three-month high amid a rise in the cost of gasoline.

● 2021 CPI forecast revised down to 1.4% from 1.7% to reflect the impact of the Movement Control Order (MCO) 2.0

- The renewed MCO restrictions in all the states except for Sarawak is expected to once again strap the economy in a straitjacket, albeit looser than the one we saw in March 2020. Due to the MCO measures and the continuation of rebates of electricity bills until 2H21, headline inflation is expected to remain in the negative territory at least until March. However, we expect a rebound to a positive growth from 2Q21 onwards on the back of the anticipated vaccine-driven recovery and low base effect.

- After a total of 125 basis point cut in 2020, the BNM has held the overnight policy rate (OPR) steady at 1.75% since July 2020 despite muted inflationary pressures and worsening domestic COVID-19 situation. With the expectation that growth would be further pared down in the 1Q21 (-2.2%; 4Q20F: -2.5%), we continue to believe there is still room for BNM to cut the OPR by another 25 basis points.

Source: Kenanga Research - 25 Jan 2021