KUALA LUMPUR: Bank Muamalat Malaysia Bhd chief economist Mohd Afzanizam Abdul Rashid says policymakers are likely to assess the situation before raising interest rates to contain inflation resulting from the impact of the conflict in West Asia and surging oil prices.
He was responding to some quarters that said Bank Negara Malaysia (BNM) should raise rates to contain inflation.
BNM governor Datuk Seri Abdul Rasheed Ghaffour had earlier told Bernama on March 5 that the central bank is closely monitoring global developments, including oil prices, potential supply disruptions, and financial market volatility.
The central bank expects to disclose its assessments later this month.
“My sense is that BNM would want to see whether the current shocks will have any material impact on growth or inflation.
“Some may argue that BNM should raise the interest rate to keep inflation at bay,” Mohd Afzanizam told Bernama.
“I believe BNM will look into the cause of inflation. The main issue here is whether there is going to be supply shortages on oil and whether the government would adjust their current subsidies mechanism whereby, at the current juncture, every income level will enjoy the subsidies.”
Malaysia continues to record a trade surplus in the oil and gas industries, totalling RM18.2bil in 2025 from RM13.2bil in 2024, largely underpinned by a surplus in refined petroleum and liquefied natural gas.
“It is also a function of government subsidies to help cushion the impact on inflation,” he said.
Nonetheless, Mohd Afzanizam suggested that fuel subsidies may need to be reviewed if the current situation persists.
“Perhaps, the next stage is to target subsidies based on income level, where those in the high-income cohort can be exempted from receiving fuel subsidies.”
The risk of higher inflation is becoming apparent, and Mohd Afzanizam cautioned that rising prices could also weigh on economic growth as households and businesses would tend to curb spending.
“There is no one-size-fits-all solution.
“But we do think the downside to growth has become elevated. As such, we are not in the camp that calls for monetary tightening at the current juncture.”
Mohd Afzanizam noted that government spending on fuel subsidies will be higher when international oil prices become elevated.
In 2022, total expenditure on petroleum subsidies amounted to RM23.1bil, with the average Brent crude price at US$99 per barrel.
The expenditure on petroleum subsidies fell to RM19.7bil in 2024 when the average Brent was at US$79.9 per barrel.
Finance Minister II Datuk Seri Amir Hamzah Azizan said the government’s monthly petrol subsidy increased to RM2bil while the diesel subsidy rose to RM1.2bil per month, totalling RM3.2bil per month, up from RM700mil previously.
At the press conference after a special Cabinet meeting last Friday, Amir Hamzah said the government is working to extend Malaysia’s oil supply security and ensure domestic supply remains stable following the conflict in West Asia.
He said efforts to obtain new supplies to replace what consumers use are continuously being carried out by Petroliam Nasional Bhd or PETRONAS and other oil companies.
“So, subsidies will move in tandem with international oil prices” Mohd Afzanizam said.
The market would want to see the possibility of a de-escalation in the conflict in West Asia, although this currently appears remote.
He said the war has cost the United States tremendously within the first six days, with the United States having spent more than US$11.3bil.
“This is not going to go well with the upcoming US midterm election in November 2026.
“Israel is also going for legislative elections sometime in October 2026. Perhaps, at some point, there could be some compromise between the two forces.”
For now, he said crude oil prices are likely to stay elevated, and markets are grappling with the new reality where geopolitical risks have become more entrenched and governments are scrambling to find the right policy response.
Some economists are talking about the possibility of crude oil prices hitting US$200 per barrel, the same figure forecast by a Goldman Sachs analyst during the 2008 oil shock.
“So, higher crude oil prices are going to be the focus,” he said.
Thus far, both parties, US-Israel and Iran, have not indicated any signs of backing down. Therefore, elevated crude oil prices are here to stay.”
He added that energy security is the heart of the problem, and measures to ensure the sufficiency of oil supplies have become the immediate priority.
While the topics of energy transition and sustainable economy have been discussed globally, he said recent developments highlight that the world remains vulnerable to oil supply shocks.
“On that note, more needs to be done to accelerate the renewable energy share in the total energy mix,” he said.
