PETALING JAYA: All eyes are on Bank Negara Malaysia’s (BNM) interest rate meeting this week, as its policy signal could ripple through Malaysia’s bond market and influence yield spreads, says AmBank Research.
If the central bank stays the course with its neutral policy stance, AmBank Research foresees a modest steepening of the curve in the medium-term horizon.
This is due mainly to a larger drop in shorter tenor yields than longer tenors.
“The front of the curve is elevated; hence, a more neutral BNM going forward should support shorter tenor bonds.
“Meanwhile, longer bonds are likely to see less support amid caution over the long-term fiscal trajectory and an upward inflation path,” said AmBank Research in a note.
A steepening of the curve due to a larger yield decline in short-dated bonds than on longer bonds occurred more recently in 2019, 2022 and 2025.
“The year 2019 to 2020 saw cuts in the overnight policy rate (OPR), but this time, without hints of a cut, the market will merely reverse its previous pricing of elevated global interest rate risks,” the research house added.
AmBank Research forecasts the three-year Malaysian Government Securities (MGS) yield at 3.15% by the end of the third quarter of financial year 2026 (3Q26), remaining unchanged in 4Q26, before easing slightly to 3.1% in the first half of financial year 2027 (1H27).
As for the 10-year MGS, yields are expected at 3.64% by end-3Q26, edging up to 3.66% in 4Q26, before settling back at 3.64% in 1H27.
This trajectory is expected to widen the 10-year/three-year spread from 36 basis points (bps) at end-2Q26 to around 50 bps by end-2026 and further to approximately 55 bps by end-1H27, it explained.
Economists are expecting BNM to hold the OPR, in an effort to reinforce Malaysia’s appeal to foreign investors and provide a stable foundation for economic growth and inflation management amid heightened global risks.
BNM’s Monetary Policy Committee will have its fourth meeting for the year on Thursday.
Among the 23 economists polled by Bloomberg, the median forecast is for the OPR to remain at 2.75%. Morgan Stanley Investment Bank is the sole outlier, forecasting the OPR at 3%.
Economists noted an unchanged OPR would support more stable foreign fund flows into Malaysia, although near-term volatility may persist.
United Overseas Bank (M) Bhd senior economist Julia Goh told StarBiz: “Near-term capital outflow risks remain heightened across emerging markets, including Malaysia, largely driven by expectations of a more hawkish Fed while sizeable upcoming initial public offerings and equity issuances could absorb liquidity and attract capital to developed markets.
IPPFA Sdn Bhd investment strategy director and country economist Mohd Sedek Jantan, in turn, pointed to the recent US employment and inflation data that have tempered expectations of further US Federal Reserve (Fed) tightening, which lowered US Treasury (UST) yields and improved global risk appetite.
“The recent foreign selling observed in May and June was driven primarily by external factors, particularly the rise in UST yields and expectations that the Fed could keep interest rates higher for longer.
“This created a more favourable backdrop for capital to rotate back into emerging markets, including Malaysia,” he explained.
He shared that from an investor’s perspective, a predictable OPR, combined with resilient economic growth, manageable inflation, a strengthening ringgit and attractive equity valuations, should improve Malaysia’s appeal to foreign institutional investors over the coming quarters.
Mohd Sedek said that keeping the OPR unchanged provides an important anchor for economic confidence.
“By avoiding unnecessary policy shifts, BNM reduces uncertainty and helps sustain private sector confidence,” he said.
He explained predictability itself has become a form of monetary support within an environment characterised by elevated global uncertainty.
“Stable interest rates allow businesses to plan investments with greater certainty, support household spending through predictable financing costs and reinforce investor confidence in Malaysia’s macroeconomic policy framework,” he told StarBiz.
Sharing similar sentiments, chief economist for the Asia Pacific region of Coface, Bernard Aw indicated that currently there is no clear reason for BNM to turn hawkish, as it continues to strike a middle ground, supporting economic growth, keeping inflation under control, and remaining attentive to evolving global risks.
“Inflation remains well anchored, while household spending and investment continue to support growth.
“At the same time, downside risks from softer global trade, geopolitical uncertainty, and weaker external demand argue against tightening,” he explained.
BNM is likely to preserve policy flexibility,” he explained.
Mohd Sedek pointed out that stable financing costs should support higher loan applications and approvals, particularly for mortgages, encouraging home purchases and other big-ticket spending.
“Combined with a healthy labour market and moderate inflation, this should continue to underpin private consumption,” he said.
He added that Malaysia’s manufacturing purchasing managers’ index, sustaining above 50, is an indication of businesses’ continued expansion, which should translate into higher capital expenditure (capex).
Meanwhile, Mohd Sedek noted maintaining the OPR would come down to policy flexibility favoured over unnecessary adjustments.
He said recent inflationary pressures are largely cost-push in nature, stemming from higher global energy prices rather than excessive domestic demand.
“Monetary policy is not an effective tool for addressing supply-driven inflation,” he pointed out.
He reiterated that Malaysia’s economic growth continues to be supported by domestic consumption, investment activity and the recovery in external demand, which reduces the need for monetary easing.
Similarly, HSBC senior Asean economist Yun Liu said there is little urgency for Malaysia to raise rates, despite spiking inflation and weak regional currencies prompting many Asean central banks to tighten policy, given the country’s resilience alongside Singapore.
She added that technology-driven growth, stronger trade, and fuel subsidies continue to support Malaysia’s widening current account and keep inflation in check.
Overall, economists said BNM a has room to remain patient on the OPR, barring a material slowdown in growth or a sustained surge in inflation.
“A materially more hawkish or dovish Fed, deviating by more than 50-bps from current expectations could significantly alter global financial conditions and prompt BNM to reassess its policy stance,” Mohd Sedek explained.
