Economists see no further OPR easing in next MPC meet after October’s 1.5% CPI drop

Economists see no further OPR easing in next MPC meet after October’s 1.5% CPI drop
-A +A

KUALA LUMPUR (Nov 25): Economists are keeping their target of a 1% contraction in inflation for 2020, after consumer prices in October fell for the eighth straight month — which was largely expected — with no further overnight policy rate (OPR) cuts expected at the next Monetary Policy Committee meeting scheduled for January next year.

October's consumer price index dropped 1.5% in October from a year earlier, according to the Department of Statistics Malaysia (DOSM) today, dragged by a decline in transport (-10.2%), housing, water, electricity, gas and other fuels (-3%), and clothing and footwear (-0.4%).

Deflationary pressure is likely to persist in November, CGS-CIMB economist Michelle Chia said in a note, as an appreciating ringgit against the US dollar helped to mitigate higher oil prices to result in a further 2.5% to 2.9% decline in petrol prices month to date, while retail price for diesel only rose 1%.

“We project a rebound in the headline inflation from -1.1% in 2020 to +1.6% y-o-y in 2021, amid dissipation of the oil price base effect,” said Chia.

MIDF, who maintains its 2020 inflation forecast at negative 1%, said improvements in oil prices are anticipated to remain sluggish on mounting demand concerns, particularly over surging Covid-19 cases.

“In addition, the implementation of government electricity bill discounts until the end of the year will cushion some impact of utilities charges on the consumers hence contributing to downward pressure to the CPI.

"Despite Malaysian consumers resuming their spending activities, we opine that the recovery for spending on non-essential items and the overall domestic expenditures will take time to fully recover. Consumers may hold back their spending plans on concerns over future personal finances and outlook for the job market,” MIDF said in a note.

Nevertheless, there could be some upward pressure in prices of food and beverages, especially fresh items in upcoming months due to festive seasons, MIDF added.

Going into 2021, headline inflation is expected to turn moderately positive as the domestic economy is seen recovering, said UOB Malaysia senior economist Julia Goh and economist Loke Siew Ting.

“Commodity prices are expected to pick-up in line with recovery in demand but are likely to remain below pre-pandemic levels. Consumer demand and sentiment have taken a backseat following the resurgence of Covid-19 infections, underscoring underlying inflation expectations. We reiterate our full-year inflation forecasts of -1% for 2020 and +2.1% for 2021,” they said in a note today.              

CGS-CIMB, MIDF and UOB do not expect any further cuts to the OPR at Bank Negara Malaysia’s (BNM) next monetary policy meeting on Jan 20, 2021, implying that the rate is expected to be maintained at its current level of 1.75%.

“In view of recovering economic activities, we foresee that BNM will not be pressured to further ease the policy rate for now. The cumulative cuts of 125 basis points in OPR earlier this year is sufficient to provide accommodative monetary policy support to Malaysia’s economy,” MIDF said.

Tan Choe Choe