Malaysia: Positive inflation trajectory starts with 0.1% in February

Headline Inflation Posted Its First Positive Reading In 12 Months

Malaysia returned to positive inflation for the first time in 12 months at 0.1% y/y in February (January: -0.2% y/y). This came in close to ours (+0.3%) and Bloomberg consensus (+0.2%). On a m/m basis, CPI rose 0.3% (January: +1.2% m/m). Year-to-date (YTD), headline inflation averaged -0.1% in the first two months of 2021 (January-February 2020: +1.5%).

The marginal uptick of 0.1% in February was mainly due to higher prices of fuel, selected food items, alcoholic beverages, and furnishing & household equipment amid the ongoing containment measures and electricity bill discounts during the month.

Transport price deflation narrowed further to -2.0% y/y in February (from -5.1% y/y in January) as fuel prices continued to track higher global oil prices. Key factors that kept the overall transport price index in deflation territory were an extension of sales tax exemptions for passenger vehicles, restrictions on interstate travel (except through travel agencies), and continued international border closures to contain the spread of COVID-19 infections.

Food & non-alcoholic beverages price inflation inched lower to 1.4% y/y (January: +1.5% y/y), with most food items seeing prices easing marginally, except for fish and seafood (February: +2.3% y/y; January: +0.6% y/y), milk and eggs (February: +2.5% y/y; January: +1.8% y/y), oils and fats (February: +2.0% y/y; January: +1.9% y/y) and fruits (February: +1.3% y/y; January: +1.0% y/y).

Furnishing, household equipment & routine household maintenance component recorded an uptick in price inflation to 0.3% y/y (January: +0.2% y/y) as a result of costlier furnishing and household equipment. Alcoholic beverages & tobacco price inflation maintained at 0.7% y/y, the highest rate since October 2019, solely due to pricier alcoholic beverages.

In contrast, restaurants & hotel price deflation widened to -0.3% y/y (January: -0.1% y/y) as a consequence of the extension of movement control order as well as interstate travel ban through February.

Core inflation rose at a constant pace of 0.7% y/y for the fourth straight month. It also stayed below the 1.0% level for the fifth consecutive month, suggesting a lack of demand price pressures for now while the projected uptrend in headline inflation is mainly due to transitory factors (i.e. supply disruptions and higher global commodity prices). Services inflation remained at 0.8% in February for the second straight month (January: 0.8% y/y).

Higher Inflation Outlook, Neutral Monetary Policy Stance

The full-year inflation reading is expected to average higher at a positive rate of 3.0% this year (2020: -1.1%). This comes as the economy is expected to recover further following the roll-out of vaccines and additional policy support, higher global commodity prices, and year-ago low base effects.

In BNM’s March monetary policy statement, BNM affirmed that headline inflation is anticipated to temporarily spike in 2Q21 due to the lower base from the low domestic retail fuel prices in the same period a year ago, before moderating thereafter. However, the outlook is subject to volatile global oil and commodity prices.

We project Brent oil prices to hover between USD60-70 /bbl this year (2020: average USD43.21). However, we expect upside risks to headline inflation will be tempered by the extension of sales tax exemption for passenger vehicles and electricity bill discounts until the end-June 2021, and the reintroduction of price ceiling on petrol RON95 and diesel.

Despite a higher inflation outlook this year, we expect muted underlying demand price pressures amid elevated unemployment rates to keep Bank Negara Malaysia (BNM)’s monetary policy stance in neutral mode.

BNM is also less likely to use broad and blunt policy tools at this juncture. In line with a more targeted fiscal approach to aid recovery this year, BNM is more inclined towards targeted measures including the recent upsizing of targeted SME financing funds by RM2.7 billion under the latest PERMERKASA package.

We project the key policy rate to remain at 1.75% for the rest of 2021. The next monetary policy decision is scheduled on 6 May. Key events to watch out for over the next 1-2 weeks include FTSE Russell’s World Government Bond Index Review (on 29 March), the publication of BNM’s 2020 Annual Report and Financial Stability Report (on 31 March), the publication of Ministry of Finance’s Fiscal Outlook Report (by end-March), and announcement on containment measures (before 31 March).