PETALING JAYA: Economists believe that there remains some upside risk to production costs from fluctuations in global oil prices, which argues for keeping some flexibility in monetary policy, while largely concurring with a stable overnight policy rate (OPR).
Bank Negara Malaysia (BNM), as expected, kept the OPR at 2.75% at its latest Monetary Policy Committee (MPC) meeting yesterday, since adopting the current standing some 14 months ago.
The central bank commented that the current OPR level is consistent with the outlook of continued price stability and sustainable economic growth.
“The MPC will remain vigilant to ongoing developments and assess the balance of risks surrounding the outlook for domestic inflation and growth,” it said.
Economist Mohd Sedek Jantan pointed out that the one metric that could materially shift the balance for BNM is Malaysia’s inflation trajectory.
“A sustained move in inflation materially below the current range, particularly toward or below 1.6%, would strengthen the case for a cut, while a renewed and persistent acceleration in inflation, especially if accompanied by higher input costs, would increase the case for holding or potentially tightening policy,” he told StarBiz.
He said this adaptability is crucial in light of the still ongoing conflict in the Middle East which has directly contributed to the extended oil price volatility.
Moreover, Mohd Sedek, who is also investment strategist at IPP Global Wealth, said a stable policy rate reduces the risk of a sudden increase in borrowing costs for households and provides greater visibility for consumption and financial planning.
He added: “For businesses, the benefit is arguably more significant because investment and financing decisions are typically larger, longer term and more sensitive to the cost of capital.
“The ringgit could also benefit indirectly from greater policy stability, although its near-term direction will continue to be influenced by global interest rates and external market conditions.”
Nevertheless, Mohd Sedek acknowledged that the transmission to actual economic activity is not immediate, noting that borrowing costs can adjust relatively quickly, but the impact on consumption, investment and ultimately growth generally takes several quarters to become fully visible.
This is as households and companies adjust their spending and investment plans should there be any changes to the central bank’s monetary policy.
On its part, while conceding that uncertainties surrounding the Middle East conflict will continue to weigh on global growth amid continued inflationary pressures, echoing Mohd Sedek’s sentiments, BNM said the impact is expected to be cushioned by sustained tech-related spending.
“Downside risks to global growth remain, stemming from prolonged geopolitical tensions, tighter global financial conditions and concerns over valuations in financial markets.
“Upside potential includes stronger tech spending, faster-than-expected recovery in supply chain conditions and pro-growth policy measures in key economies,” said the central bank yesterday.
More crucially, it reported that headline and core inflation in the first seven months of the year averaged 1.8% and 2% respectively, before adding that despite elevated costs and strong economic growth, the pass-through to consumer prices has been contained by domestic policy measures and stable demand conditions, amid limited spillover of external sector strength to wages.
Looking ahead, Mohd Sedek reckoned that for BNM to begin a meaningful easing cycle later this year, it would need to see a combination of softer domestic inflation and weaker growth momentum, alongside a less restrictive global monetary environment.
More importantly, he pointed to the fact that major global central banks are still maintaining relatively high rates which limits the room for aggressive easing, particularly given the implications for capital flows and the ringgit.
“A sustained decline in inflation toward or below 1.6%, particularly if accompanied by weaker domestic demand or a deterioration in the labour market, would make a cut more compelling.
“However, a single low inflation reading would not necessarily be sufficient. BNM would likely need greater confidence that the disinflation trend is persistent,” he said.
On the other hand, the economist said prolonged stability at 2.75% does not necessarily pose a major risk to growth if inflation remains contained and domestic demand stays resilient.
He said the greater risk would arise if economic momentum weakens materially while monetary conditions remain unnecessarily restrictive.
“Conversely, cutting too early when cost pressures remain vulnerable to oil price fluctuations could risk reigniting inflationary pressures,” he cautioned.
Meanwhile, an economist with a foreign brokerage said he is not expecting a meaningful easing cycle later in 2026 under the current baseline, predicting that the central bank would continue to hold through the remaining November meeting.
“The first move will more likely be a gradual normalisation (hike) in 2027 once external uncertainties recede and growth remains robust.
“A genuine easing cycle would require a clear deterioration on both the growth and inflation fronts simultaneously.”
