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Malaysian headline inflation contracts year-on-year in February, BNM likely to cut rates by 25 bps in May

Malaysian headline inflation contracts year-on-year but rises sequentially in February; however, the underlying momentum does not imply that inflation will become a constraint to policy easing. However, on a year-on-year basis, inflation contracted for the second straight month. Sequentially, the consumer price inflation rose 0.2 percent with three components – food, housing and utilities, and transportation costs, adding to the bulk of the sequential rise. The recent rise in crude oil prices possibly led to higher transportation costs, which rose 0.45 percent sequentially.

On a year-on-year basis, the headline inflation contracted 0.4 percent, as compared to the prior month’s contraction of 0.7 percent. Transportation costs were significantly lower by 6.8 percent year-on-year.

Core inflation accelerated moderately at 0.3 percent year-on-year, as compared with the 0.2 percent figure seen in January. The trend continues to be benign, noted ANZ in a research report. The inflation data should be considered in conjunction with the softness in high frequency indicators, including the leading index, PMI, and credit growth. This backdrop of the soft inflation and growth makes a solid case for policy easing.

“We expect a single cut of 25bps in the OPR at the next policy meeting on 7 May. In our view, the last Monetary Policy Statement (MPS) had already introduced wording that have in the past been associated with imminent policy easing. At the same time, deeper rate cuts are also unlikely, considering the low amplitude of the OPR outside crisis periods”, added ANZ.

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