UOB Research: Malaysia’s headline inflation sees smaller contraction of 0.2pc

UOB Research said the uptrend in CPI this year will be driven by projected economic recovery amid the roll-out of vaccines that starts today, higher global commodity prices, and year-ago low base effects.  — Picture by Hari Anggara
UOB Research said the uptrend in CPI this year will be driven by projected economic recovery amid the roll-out of vaccines that starts today, higher global commodity prices, and year-ago low base effects. — Picture by Hari Anggara

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KUALA LUMPUR, Feb 24 — Malaysia’s headline Consumer Price Index (CPI) fell at a slower pace of 0.2 per cent year-on-year (y-o-y) in January 2021 from -1.4 per cent y-o-y in December 2020, coming in lower than the -0.1 per cent estimate by UOB Global Economics & Markets Research.

On a month-on-month (m-o-m) basis, the CPI posted the strongest gain since February 2017 by 1.2 per cent (December 2020: +0.5 per cent m-o-m).

“The lower CPI decline was mainly due to higher fuel prices, a persistent uptick in selected food items, as well as the effects of lower electricity bill discounts and rebates for the first six months of 2021.

“Other factors that weighed on the CPI included continued sales tax exemptions for passenger vehicles and the reinstatement of the movement control order (MCO 2.0) in mid-January,” said UOB in a research note today.

It said transport price declines tapered to the lowest rate in 13 months at 5.1 per cent y-o-y (December 2020: -8.4 per cent y-o-y) as fuel prices continued to track higher global oil prices.

A moderate recovery in airfares, an extension of sales tax exemptions for passenger vehicles, as well as inter-district and interstate travel ban during MCO 2.0 were among other factors that weighed on transport price deflation last month, said UOB Research.

“This affirms our view of a return to positive headline CPI in the first quarter of 2021 (Q1 2021).

“The uptrend in CPI this year will be driven by projected economic recovery amid the roll-out of vaccines that starts today, higher global commodity prices, and year-ago low base effects.

“We are likely to tweak our 2021 full-year inflation target of +2.1 per cent higher amid signs of higher global oil prices,” it said.

UOB Research expects Bank Negara Malaysia (BNM) to keep the Overnight Policy Rate (OPR) unchanged at 1.75 per cent at the upcoming Monetary Policy Meeting on March 4.

“Despite a weak gross domestic product (GDP) and the extension of MCO 2.0, we think BNM is less inclined to use broad and blunt monetary policy tools at this stage.

“BNM has kept its key policy rate on hold since September 2020,” said UOB Research.

Meanwhile, CGS CIMB Research said in a separate note that inflation expectations have resurfaced sharply in financial market indicators in recent weeks.

It believes that inflationary pressure in the CPI basket will be transitory, driven largely by cost-push factors.

“The rapid retreat in downward pressure on the headline CPI and also the relaxation of movement restrictions have seen the markets trim expectations of further monetary policy easing.

“However, with a negative output gap, elevated unemployment rate, and subdued core inflation persisting in 2021, the argument can still be made for one further 25 basis points cut in the OPR to 1.50 per cent,” said CGS CIMB. — Bernama

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