● The headline inflation turned positive in February (0.1%) after eleven months of deflation, a tad below expectation (KIBB: 0.2%; consensus: 0.2%)

- Despite facing the full brunt of Movement Control Order (MCO) 2.0 in February, inflation rate climbed above zero for the first time since Feb 2020 on the back of rising global crude oil prices.

- MoM: eased to a three-month low (0.3%; Jan: 1.2%) on muted inflationary pressure in food prices (0.0%; Jan: 0.2%).

- Core inflation: remained unchanged for the fourth straight month at 0.7%.

● Inflation returned to positive territory due to a softer YoY decline in fuel prices and a relatively stable food prices

- Transport (-2.0%; Jan: -5.1%): smallest contraction in one-year, attributable to the sharp increase in Brent crude oil price (30.9% YoY to USD66.1/bbl; Jan: -3.9% to USD55.9/bbl).

- Food and non-alcoholic beverage (1.4%; Jan: 1.5%): growth moderated slightly due to the decrease in prices of food away from home (1.4%; Jan: 1.6%), reflecting reduced domestic mobility during the implementation of MCO 2.0.

- Housing, water, electricity, gas & other fuels (-0.8%; Jan: -0.7%): edged down to a 2-month low on a higher base effect.

● Mixed inflation growth across advanced and developing economies

- US (1.7%): rose to a one-year high, supported by higher gasoline prices, but underlying inflation remained subdued.

- Singapore (0.7%): accelerated to a 13-month high on higher private transport inflation.

- China (-0.2%): second straight month of deflation, albeit at a slower pace than Jan's -0.3%, due to higher food prices and transport costs during the Spring Festival season.

● 2021 headline inflation forecast revised up to 1.8% from 1.4% (2020: -1.2%) on the expectation of higher commodity prices as vaccine-led recovery gathers pace

- The inflation rate is expected to continue to rise in the next few months, mainly due to the lower base of last year, higher retail fuel prices and unleashing of pent-up demand post-MCO 2.0. In addition, Malaysia's COVID-19 vaccination drive is seen to boost consumer's consumption and push inflation higher. However, the ongoing pandemic could continue to pose downside risks to the inflation outlook as some of the COVID-19 measures are still in place and the domestic labour market is still weak.

- On the monetary front, BNM is expected to keep the overnight policy rate (OPR) unchanged at 1.75% for the rest of 2021 on the back of positive economic outlook, given the loosening of COVID-19 restrictions, PEMERKASA's RM20.b stimulus package and Malaysia's inoculation progress. Nevertheless, BNM still has room to reduce the OPR should the recovery pace weaken.

Source: Kenanga Research - 25 Mar 2021