MIDF: Inflation likely to remain low

PETALING JAYA: Malaysia’s inflation rate is expected to remain low in the first half of this year thanks to the continuous decline in producer prices, according to MIDF Research.

A low inflation rate would be a boon for savers as they would have more spending power and opportunities to earn an inflation-beating return on their cash.

The low inflation rate expectation came about after the latest producer price index (PPI) showed another decline in February, marking 14 months of consecutive decline.

“As a leading indicator of price changes at the consumer level, the latest PPI number suggests that Malaysia’s headline inflation to stay low for the first quarter of 2019 as well as in 2Q19,” MIDF said in a report yesterday.

MIDF pointed out that the decline in PPI in February was in line with the other regional economies.

For instance, it said Thailand’s PPI contracted by 0.6% year-on-year (y-o-y), its third consecutive month of negative growth, while the United States shrank by 0.3% y-o-y, the first contraction since October 2016.

In China, PPI remained in negative territory since November 2017. In February, China’s PPI fell 3.5% y-o-y.“Moving forward, we foresee a slight rebound in PPI globally amid gradual pick up in the global energy prices in 2Q19,” the research house said.

Notably, continuously falling producer prices will further eat into profits at many firms, which had seen their earnings falling in the past few months.

This in turn would put pressure on investment, consumption and employment.

Bank Negara had revised Malaysia’s 2019 economic growth forecast to between 4.3% and 4.8%, down from previous estimate of 4.9% growth estimated in the government’s budget released in November, and compared with a 4.7% pace recorded in 2018.

Central bank governor Datuk Nor Shamsiah Mohd Yunus said the downgrade in growth outlook was mainly due to worsening global conditions.

Meanwhile, several economists are expecting Bank Negara to cut its interest rate this year on the back of slower economic growth as well as taking a cue from the shift in the US Federal Reserve’s monetary policy guidance.

“Given the downside risk facing 2019 growth, plus the outlook of benign inflation as the official inflation rate forecast is lowered to 0.7%-1.7% from 2.5%-3.5% previously, we expect Bank Negara’s Overnight Policy Rate (OPR) to be cut this year by 25 bps to 3.00% compared to no change at 3.25% previously,” said Maybank IB Research.

It said that the official forecast by Bank Negara to lower its economic growth numbers signified risks to growth were tilted to the downside due to external and domestic factors including unresolved US-China trade tension, policy uncertainties such as the direction of US monetary policy and commodity price volatility and oversupply in property market dampening construction activities.

CIMB Research reckoned that a cut in the OPR rates would be positive for the property, automotive and consumer sectors as it would increase the consumers’ disposable income.

“A rate cut is also positive for companies with high ringgit borrowings as it will result in lower interest expense,” it said in a report yesterday.

Meanwhile, the losers of a rate cut would be the banking sector as well as companies with net cash balances.

“Overall, we are of the view that a 25 basis point cut in OPR may be a short-term positive for the stock market from a sentiment perspective,” CIMB said.

Source : TheStar