Published on 20 Feb 2020.
RAM Ratings expects Malaysia’s overall inflation rate to rise to 1.8% in January 2020, from 1.0% the preceding month. The projected increase is underpinned by higher transport fuel inflation amid the low-base effects on retail fuel prices. The average price of RON95 petrol rose 4.9% y-o-y in January 2020, in contrast to the 5.5% contraction in December 2019.
While the duration and severity of the COVID-19 pandemic remain uncertain, it has already depressed world oil prices as China (the epicentre of the outbreak) is the second largest source of global demand. That said, our base-line assumption for Brent crude prices to average around USD55-USD60 per barrel this year still holds, albeit with a downside skew given the current dampened state of economic affairs. However, if Brent crude were to hover around USD50/barrel through the whole of 2020, headline inflation could fall to 1.2%, from our current forecast of 1.7% in 2020.
Given the significant risk that the COVID-19 pandemic could derail economic growth, we expect Bank Negara Malaysia to cut the Overnight Policy Rate (OPR) again in the next six months to 2.50% for the year. This would provide some respite and greatly assist businesses during this period of uncertainty and economic stress. In the same vein, the targeted fuel subsidies programme, which would have floated consumer fuel prices to market levels, may also be put on the backburner to sustain household spending. The downtrend of global oil prices provides some leeway for the delay without compromising fiscal spending.
Woon Khai Jhek, CFA
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