UOB economists Julia Goh and Loke Siew Ting note that Malaysia’s headline inflation in May rose to 2.0% year-on-year, the highest level since July 2024, driven by food, housing, utilities and transport. Year-to-date inflation of 1.7% confirms their full-year forecast of 2.0%. They highlight supply-side shocks from the Middle East conflict and El Niño, but expect Bank Negara Malaysia to maintain the overnight rate at 2.75% until 2026.
Inflation risk, but stable policy
“YTD inflation of 1.7% in the January-May 2026 period supports our full-year forecast of 2.0% (BNM estimates: 1.5-2.5%; 2025: 1.4%). While the initial U.S.-Iran peace agreement may help ease tensions in the Middle East, cost pressures are likely to remain elevated in the near term.”
“Additionally, the occurrence of El Niño in the period from June 2026 to mid-2027 is expected to increase grain prices, creating a risk of rising inflation, despite continued fuel subsidies dependent on oil prices remaining below $200 per barrel.”
“With core inflation continuing to decline – pointing to softer domestic demand – coupled with manageable headline inflation, given continued subsidies and lower global energy prices contingent on easing threats to the security of oil supply, Bank Negara Malaysia (BNM) is likely to continue to keep a close eye on its key interest rate while keeping an eye on the evolution of external risks and adjusting policy settings as necessary.”
“In summary, prevailing price pressures remain largely supply-side driven, while the continued moderate pace of core inflation points to easing domestic demand conditions.”
“We therefore maintain our view that the overnight rate (OPR) will remain stable at 2.75% for the full year.”
(This article was created with the aid of an artificial intelligence tool and has been reviewed by an editor.)
