Malaysia’s headline inflation remains steady at 0.2% yoy in April 2019


HIGHLIGHTS

April 2019 consumer price inflation

  • Headline inflation was steady at 0.2% yoy in April. We revise our 2019 forecast from +1.8% to +1.0% amid weaker-than-expected inflation outturn in 4M19.
  • Trade tensions obscure Malaysia’s growth outlook heading into 2020F; further monetary easing may be required. We pencil in an OPR cut in 1H20F.

Benign price pressure in April
Headline inflation in Apr was milder than expected at 0.2% yoy, the same pace as in March. Sequentially, price levels tend to be stable in April, except in 2015 when the introduction of the Goods and Services Tax (GST) prompted a sharp mom increase in the headline CPI.

Mild fluctuations in food and transport price index
The fuel & lubricants sub-index contracted at a slower pace of 4.2% in April (-4.8% yoy in March) due to higher RON97 petrol prices (+9.5% yoy/+7.6% mom in April). Meanwhile, air transportation inflation was steeper at 6.5% yoy (+5.4% yoy in March). Food inflation remained in check (+1.1% yoy in April), but could have risen in the first weeks of the fasting month that began on 6 May and ahead of the Festive Season Price Control Scheme, which was extended to 30 days (21 May-19 June) and covers 27 items.

Stable core inflation
Excluding volatile items, core inflation was unchanged in April at 0.5% yoy. A smaller drop in non-fuel transport prices (-2.7% yoy in April vs. -3.2% yoy in March) offset steeper price declines in clothing and footwear (-3.2% yoy in April vs. -3.0% yoy in March) and healthcare (-0.3% yoy vs. -0.2% yoy in March), as well as weaker inflation in furnishing, household equipment and maintenance (+0.2% yoy vs. +0.3% yoy in March), restaurants and hotels (+0.8% yoy vs. +1.0% yoy in March), and education (+1.2% yoy vs. +1.3% yoy in March).

Confluence of factors exert downward pressure on inflation
We expect a hike in inflation in Jun as the transitory effects of the GST phase fade out. That said, headline inflation YTD has been tracking below our expectations on the back of subdued global food and energy prices keeping producer price pressures low, an extended cap on RON95 and diesel prices, and various policy measures to alleviate the high cost of living for households. Taking the weak inflation trend in 4M19 into consideration, we cut our 2019 headline CPI inflation forecast from 1.8% to 1.0%.

Dovish policy posture
The Overnight Policy Rate (OPR) cut on 7 May as pre-emptive action against an increasingly obscured growth outlook. Anticipation of a recovery in external demand appears to be stalling as the saber-rattling between the US and China lurches beyond tariff threats into restrictions on market access. Headwinds to trade and investment activity are likely to hit harder next year, in our view, and may justify a more supportive monetary policy stance. We project the OPR to remain on hold in 2019F, and pencil in a cut for 1H20F.

Originally published by CIMB Research and Economics on 24 May 2019.

This article has been edited to reflect its time-sensitivity.