● The headline inflation accelerated to a 34-month high of 1.7% YoY in March, below house forecast and a tad above consensus (KIBB: 1.9%; consensus: 1.6%)

- The sudden spike in the inflation rate was mainly attributable to a low base effect, arising from last year’s commodity price slump, due to the advent of COVID-19 pandemic. This, coupled with the optimism over a vaccine-fuelled recovery has helped to push the overall CPI higher.

- MoM: remained at its softest growth in three months at 0.3%.

- 1Q21: rebounded after three straight quarters of deflation (0.5%; 4Q20: -1.5%).

- Core inflation: remained unchanged for the fifth consecutive month at 0.7%.

● Inflation soared to a near three-year high, driven by a significant rebound in fuel prices and a relatively steady food prices

- Transport (9.8%; Feb: -2.0%): its first positive growth since Feb 2020 due to a double-digit surge in retail fuel prices (RON95: 17.6% YoY, Feb: -5.7%), in tandem with a pronounced YoY rebound of 179.4% in Brent crude oil price.

- Food and non-alcoholic beverage (1.5%; Feb: 1.4%): increased marginally due to the rise in prices of food at home (1.6%; Feb: 1.4%), especially meat, fish and seafood, fruits, and vegetables.

● Rising inflationary pressure across advanced and developing economies

- US (2.6%): surged to the highest level since August 2018 as the cost of gasoline jumped amid higher consumer demand.

- Eurozone (1.3%): rose to a 14-month high on higher energy and non-processed food prices, but underlying inflation remained benign.

- China (0.4%): rebounded in March after two straight months of deflation due to higher commodity prices and a low base effect.

● 2021 headline inflation forecast maintained at 1.8% (2020: -1.2%) despite signs of inflationary pressure, as downside risks remain amid Malaysia’s slow vaccination rate and a resurgence in COVID-19 cases

- The inflation rate is expected to hover around 3.0-5.0% in the near term, but will drop back down to average below 2.0% in the 2H21 as the low base effect diminish. We remain cautious over 2021 inflation outlook due to rising local COVID-19 cases, as well as a shortage of vaccines as Malaysia kicked off the second phase of its COVID-19 vaccination programme.

- Despite a rise in inflation, we expect the BNM to keep the overnight policy rate (OPR) unchanged at the next Monetary Policy Committee meeting (May 6). Nevertheless, we continue to believe there is still room for BNM to cut the OPR to an all-time low of 1.5% should the local COVID-19 situation worsen and the Movement Control Order is reimplemented.

Source: Kenanga Research - 26 Apr 2021