● The headline inflation softened to 3.4% in June, a tad lower than expectation (KIBB: 3.5%; consensus: 3.5%; May: 4.4%)

− Despite a MoM rebound in food prices in June (0.3%; May: - 0.1%), Malaysia’s inflation eased on a YoY basis due to the implementation of the full-scale Movement Control Order (MCO) on June 1 and as 2020 low base effect began to dissipate.

− MoM: growth inched up marginally (0.1%; May: 0.0%).

− 2Q21: rose at the fastest rate (4.2%; 1Q21: 0.5%) since 1Q17.

− Core inflation: edged down slightly (0.7%; May: 0.8%).

● Softer-than-expected growth in prices, driven by a moderation in transport and food and non-alcoholic beverages indices

− Transport (16.6%; May: 26.0%): slowed to a three-month low and registered the first MoM decline (-0.2%; May: 0.2%) in seven months, despite higher RON97 and Brent crude oil price. The softer growth in transport prices was probably due to a sharp moderation in transport services cost (0.1%; May: 4.4%) amid the full-scale MCO.

− Food and non-alcoholic beverage (1.3%; May: 1.5%): moderated to a ten-month low, primarily due to cheaper prices for food at home (1.3%; May: 1.5%), especially fresh meat (-1.6%; May: 1.4%) and fruits (0.8%; May: 1.3%).

− Housing, water, electricity, gas & other fuels (3.2%; May: 3.2%): growth unchanged due to last year electricity bill rebates.

● Mixed inflation trend across advanced and developing countries

− US (5.4%): increased for the fifth consecutive month, matching a level last seen in August 2008 as travel-related expenses soared due to the reopening of the economy.

− Japan (0.2%): rebounded in June after eight straight months of deflation due to higher energy costs.

− Thailand (1.3%): moderated to a three-month low due to the government utility subsidies.

● 2021 headline inflation forecast retained at 1.8% (2020: -1.2%) amid heightened COVID-19 uncertainty

− The inflation rate is projected to hover around 1.0-2.0% in the 2H21 as the low base effect starts to wear off, bringing the CPI to trend lower in the next few months due to the rising domestic COVID-19 cases, prolonged full-scale MCO and PEMULIH electricity bill discounts. However, government measures (i.e. loan moratorium, EPF withdrawal) and several state transitions into the Phase 2 of the National Recovery Plan may support consumer spending.

− At this point, we believe that the Bank Negara Malaysia (BNM) will likely keep the overnight policy rate (OPR) unchanged at 1.75% for the rest of the year. Nonetheless, there is still room for BNM to cut the OPR should the current unabated rise in COVID-19 infections leads to a further extension of the Phase 1 restrictions in key economic states (i.e. Selangor, Kuala Lumpur), upending Malaysia’s growth prospects.

Source: Kenanga Research - 26 Jul 2021