PETALING JAYA: Economists are advocating a cautious outlook on the country’s growth and inflation scene, as Bank Negara Malaysia (BNM) has decided to keep the overnight policy rate (OPR) at 2.75% after the latest Monetary Policy Committee meeting yesterday.
The central bank, while acknowledging that global growth had remained resilient in the first quarter of 2026 (1Q26), said sharp increases in energy and commodity prices as well as supply chain disruptions from the Middle East conflict are beginning to weigh on worldwide growth momentum.
“Downside risks to global growth remain elevated stemming from the uncertainties surrounding the length and severity of the conflict, tighter global financial conditions and concerns over valuations in financial markets,” said BNM in a statement.
Nevertheless, it pointed out that upside potential includes de-escalation of the US-Iran conflict, leading to improving supply chain conditions, stronger tech spending and pro-growth policy measures in key economies.
For Malaysia, the central bank reported that latest indicators are pointing towards continued growth momentum in 1Q26, driven by sustained domestic demand and strong export performance.
Bank Muamalat Malaysia Bhd chief economist Mohd Afzanizam Abdul Rashid believes that BNM has turned more dovish as the impact from the oil shock is likely to drag the global growth lower.
“Hence, being an open economy, Malaysia will continue to be susceptible to downside risk to global growth.
“Higher prices will mean consumer budgets will be negatively affected, and therefore, they will become selective in their spending pattern,” he told StarBiz.
Similarly, Mohd Afzanizam is expecting businesses to be more prudent with their capital and operating expenditure, as they look for ways to lower costs. Crucially, he said that the OPR will either stay at 2.75% for the whole year or there could be a scope to cut to support growth.
“For now, we see keeping the OPR steady is the best course of action by BNM,” he said.
On the flip side, executive director at the Socio-Economic Research Centre Lee Heng Guie felt that BNM, being constrained by rising inflation risks amid continued economic growth momentum, is not about to embark on monetary easing soon.
Given the supply-driven oil shock, he believes the central bank is leaning more towards anchoring inflation expectations, especially second-round inflation, which he defined as the indirect, subsequent impact of an initial supply-side shock on wage demand and price setting behaviour.
At present, Lee said while the first-round shocks such as direct oil price increases and rising costs due to supply chain disruptions will inevitably cause higher inflation, the demand pressure is not prevalent.
“Should the conflict in the Middle East escalate, however, accompanied by the deepening supply chain disruptions and persistent soaring energy costs, this will likely trigger a global recession with high inflation, affecting global trade and investment.
“Malaysia will be impacted via slowing exports, higher imported inflation and sustained domestic cost pressures, and hence, reduced consumer discretionary spending and lower business spending,” Lee cautioned, before adding that he is holding a baseline 2026 gross domestic product (GDP) estimate of 4.3% for Malaysia.
At the same time, Mohd Afzanizam highlighted that logistics costs have also gone up, following the sharp rise in transportation by shipping and air cargo, observing that the producers’ price index (PPI) had jumped 4.1% month-on-month in March.
The PPI measures the average change over time in the selling prices received by domestic producers for their output.
Eventually, Mohd Afzanizam said these higher business costs will be passed on to the end-consumer, who, in turn, would review their budgets.
“Consumers could down-trade into lower-quality products and focus on needs rather than wants. As such, airlines and tourism would see an immediate impact.
“Big-ticket items such as automobiles and properties will also be impacted, as consumers would want to save more,” he noted.
More importantly, the economist now anticipates that subsidies would remain as a prominent policy tool in dealing with the higher cost of living, despite there having been efforts for subsidy rationalisation from the government.
“Nonetheless, how high could oil prices go? How sustainable are the fiscal resources to support the subsidies bill? These are the questions that would shape the impact on the Malaysian economy,” he said.
Fellow economist Doris Liew echoed Mohd Afzanizam’s sentiments, as she stressed that Malaysia’s ability to cushion the shock through subsidies is increasingly limited, with the government already stretching its fiscal position, cutting development spending and entering a consolidation phase.
“Continuing to rely on broad-based subsidies while tightening fiscally elsewhere creates trade-offs that may not be sustainable if the shock persists. The policy challenge ahead lies in managing these constraints as the government seeks to balance cost-of-living support, fiscal space, and longer-term growth,” she said.
Of interest, senior Asean economist at HSBC Yun Liu commented that before the Middle East conflict, the economy was in a “Goldilocks” stage, with strong growth and stable inflation prospects.
While the conflict has increased the possibility of downside risks to growth and upside risks to inflation, she said Malaysia is on a more resilient footing than its peers, as it is a net energy exporter.
“This is not to say Malaysia will not be insulated from the energy shock, but the impact should be smaller than other Asian economies, which are heavily dependent on oil and gas imports from the Gulf region,” said Liu.
Professor of economics at Sunway University Dr Yeah Kim Leng feels that Bank Negara’s continued hold on the OPR is appropriate given Malaysia’s healthy first quarter advance GDP growth estimate, coupled with slowing but still healthy manufacturing exports.
“A sharper-than-expected rise in consumer inflation in the coming months but viewed to be temporal in nature may not trigger a rate hike but it will likely preclude any rate cut to support growth.
“Should world oil prices stabilise and revert to US$70 to US$80 a barrel, there may be room for monetary easing to support growth should domestic growth conditions and global demand weaken substantially,” he told StarBiz.
Bank Negara, on its part, projected that investment activity will be driven by the progress of multi-year projects in both the private and public sectors, implementation of new smaller-scale public projects, continued high realisation of approved investments, as well as the ongoing implementation of national master plans.
It said the external sector will benefit from continued strength in electrical and electronics (E&E) exports, while tourist spending will be sustained albeit at a more moderate pace.
The monetary authority revealed that headline and core inflation averaged 1.6% and 2.1% in the first quarter of 2026, respectively, but noted higher global commodity prices arising from the Middle East conflict are expected to raise domestic cost pressures, causing inflation to “edge higher” although it should be contained.
HSBC’s Liu picked up Bank Negara’s subtle shifts in tone, alluding to the fact that the central bank now views the monetary policy stance to be appropriate and “consistent” with the outlook, as opposed to “supportive” in earlier statements.
“The last time Bank Negara changed the language from ‘supportive’ to ‘consistent’ was in May 2025, the meeting before its pre-emptive 25 basis points rate cut in July 2025. That said... we maintain our long-held view that Bank Negara will keep its policy rate steady at 2.75% throughout 2026,” she added.
