Headline inflation to revert to previous trend — UOB

KUALA LUMPUR: The headline inflation will likely revert to the previous trend once the high base effect in the transport component recedes and the targeted fuel mechanism is introduced in the secondhalf of 2019 (2H19), said United Overseas Bank (Malaysia) Bhd.

Its senior economist, Julia Goh said given the low readings of -0.5 per cent in the headline consumer price index (CPI) for January-February, the bank is tweaking its full year estimate for average inflation to 1.5 per cent (from 2.0 per cent previously) for 2019.

“The CPI fell for the second straight month by -0.4 per cent year-on-year (y-o-y) in February (Jan: -0.7 per cent y-o-y). This came in below ours and market expectations of -0.3 per cent.

“On a month-to-month (m-o-m) basis, the CPI rose +0.2 per cent (Jan: -0.5 per cent m-o-m),” she said in a statement.

Goh said the US Federal Reserve's ultra-dovish tone lends more flexibility for Bank Negara Malaysia (BNM) to consider easing rates in view of the external headwinds and weaker domestic sentiment.

“In its March monetary statement, BNM sounded more cautious on growth. We are penciling in a -25 basis points cut in the overnight policy rate to 3.00 per cent this year,” she said.

The central bank's next monetary policy decision is on May 7.

Post US Federal Open Market Committee meeting, the ringgit remained unchanged against the US dollar at 4.0600 at close.

“We expect the pair to trade between 4.05 and 4.10 in the near term, with the ringgit supported by steady flows, higher oil prices, and potential funds repatriated by Petronas and Khazanah Nasional Bhd,” Goh noted.

Meanwhile, Sin Beng Ong of Asia Pacific Economic Research said the CPI came in a touch lower than expected, leaving headline inflation at -0.4 percent y -o-y (J.P.Morgan:- 0.6 per cent, Consensus: -0.3 per cent).

Core inflation rose 0.3 per cent m-o-m. The rise in pump prices contributed the bulk of the rise in sequential inflation, while other components remained benign.

“Despite the drop in headline CPI, and the benign path expected in 2019, BNM's reaction function tends to be more sensitive to growth than inflation.

“Thus, the evolution of growth will be a key focus, and we would be looking for growth to slow to four per cent y-o-y before policy easing would be on the cards, possibly in 2H19,” he said.