PETALING JAYA: Bank Negara Malaysia (BNM) heads into this week’s monetary policy meeting with a difficult truth hanging over it: monetary policy is less effective in times of supply shocks.
As the markets expect the central bank to stay put on the overnight policy rate (OPR), economist Lee Heng Guie warned that cutting interest rates now could worsen the pressure from ongoing supply shock.
Speaking with StarBiz, the executive director of the Socio-Economic Research Centre said a wrongly timed OPR cut would heighten the risk of stagflation, where inflation rises while the economy stagnates.
“BNM will likely wait and watch because we are not seeing a major slowdown in demand. Yes, demand is slowing, but it is too early to react.
“However, if there is a significant weakening in the future, a rate cut can happen,” said Lee.
Hann Liew, chief executive officer of digital asset fund manager Halogen Capital, believes BNM would only angle towards a cut if growth slows meaningfully towards 4% due to softer domestic demand or weaker tourism receipts.
“With first-quarter gross domestic product at a higher-than-expected 5.3%, and headline inflation in March running at a controlled 1.7%, we expect BNM to hold the OPR,” said Liew.
Currently, the OPR stands at 2.75% after it was cut by 25 basis points last July from 3%. BNM’s 10-member Monetary Policy Committee will meet this Thursday – its third meeting this year – to decide on the OPR.
Bank Muamalat Malaysia Bhd chief economist Mohd Afzanizam Abdul Rashid opined that the odds of a rate cut have increased, although not in the immediate term.
“It all depends on the growth outlook, especially in the second half of the year.
“BNM will monitor how the impact of the Middle East conflict affects business profitability and unemployment.
“If the downside risks increase significantly, a rate cut is possible to support the economy,” he told StarBiz.
The US-Iran war, which began on Feb 28, has unleashed a global fuel crisis, with Brent crude currently trading at about US$109 per barrel, compared with around US$60 at the start of the year.
The conflict has also led to a blockade in the Strait of Hormuz, affecting shipments and oil flows, as about 20% of global petroleum consumption passes through the waterway.
Liew said persistently elevated energy prices will eventually feed through, even with the Budi95 petrol subsidy cushioning consumers.
“In that scenario, an OPR cut might not even be enough to buffer that impact, and we’ll need broader measures such as fiscal support from the government to stimulate demand.”
Lee said businesses are already facing cost pressures, with margins taking a hit.
“In that sense, the recent RM5bil relief facility by BNM for small and medium enterprises (SMEs), as well as the reduction of service tax on rental and leasing services, will help ease the burden,” added Lee.
On April 28, BNM announced the SME Stabilisation Relief Facility, a RM5bil financing facility to assist SMEs, including microenterprises, affected by the ongoing West Asia conflict.
Mohd Afzanizam highlighted the risk that businesses may slow capital expenditure, either for new investments or operational expansion.
“So far, we have yet to see hard evidence of that happening. But it is a risk.
“An economic slowdown will also force individuals to review their spending.
“For now, fuel subsidies still support private consumption. However, if subsidies are further rationalised in a broader manner, it may have an impact on demand,” he added.
On whether a lower OPR would encourage business expansion at this time, Liew said: “The OPR is only one input in business investment decisions, and arguably not the binding factor right now.”
He noted that despite the economic impact of the Iran war, gross business loan growth remained decent in March 2026 at 5.8% year-on-year.
“While correlated with lower rates, it’s the availability of credit that drives the growth engine. In this context, there should be a distinction between the two.
“Could the business investment cycle slow from here? Possibly, especially with all the uncertainties from the Middle East conflict, but it won’t be solely because the OPR is where it is,” Liew said.
