Inflation to hold steady amid geopolitical conflict

KUALA LUMPUR, 21 JULY 2026 —

Malaysia's inflation is expected to remain stable for the rest of 2026, despite ongoing geopolitical and energy market uncertainties, with research houses predicting that targeted fuel subsidies and stable domestic demand will keep price pressures manageable.

The moderate inflation rate is attributed to higher global oil prices, which have lifted transport costs and selected Consumer Price Index (CPI) components. However, the average inflation for the first half of the year remained moderate at 1.7% year-on-year, indicating limited spillover into the broader economy. The Producer Price Index has accelerated in recent months, but the transmission into consumer prices has yet to emerge meaningfully.

This has led research houses to believe that the current macroeconomic conditions continue to support a prolonged pause in the overnight policy rate (OPR), with Bank Negara Malaysia (BNM) expected to maintain its current monetary policy stance.

Apex Securities Research has lowered its 2026 inflation forecast to 2% from 2.1%, citing that inflation averaged only 1.8% year-on-year in the first half of the year, despite supply disruptions linked to the Middle East conflict. The research house expects targeted RON95 and diesel subsidies, together with the government's commitment to safeguard domestic fuel supplies through year-end, to continue supporting price stability.

Brent crude prices averaging about US$86.7 per barrel so far this year point to a relatively stable transport inflation outlook, provided oil prices do not experience another sharp spike.

Hong Leong Investment Bank Research has retained its 2026 CPI forecast at 2%, despite warning that renewed disruptions in the Strait of Hormuz have pushed Brent crude back above US$80 per barrel. The research house noted that while external headwinds could exacerbate the risks of pass-through to broader price levels, Malaysia's inflation trajectory remains insulated by both fiscal policy and diversification of hydrocarbon supply.

Kenanga Research, which maintained its 2026 inflation forecast at 2.1%, added that risks remain tilted to the upside as energy markets continue to face uncertainty, despite intermittent easing in geopolitical tensions.

The inflation outlook for Malaysia is further supported by the country's CPI, which rose 1.9% year-on-year in June 2026, easing from 2% in May and coming in below market expectations. The moderation reflected the lower fuel prices following easing geopolitical tensions involving Iran and the United States, while inflation was unchanged on a month-on-month basis, suggesting overall price pressures remained well contained.

According to one analyst, Malaysia's inflation outlook remains relatively benign despite external uncertainties, thanks to targeted subsidies, which could continue to cushion the impact of higher global energy prices on consumers.

In terms of the regional impact, Malaysia's stable inflation rate is expected to have a positive effect on the overall economy, with resilient domestic demand and contained underlying inflation allowing policymakers to maintain a steady monetary policy stance. The relative stability of the ringgit is also expected to support the economy, despite external uncertainties.

However, research houses have cautioned that prolonged disruptions in energy markets could eventually raise logistics, transport, and food costs, while adverse weather conditions, including a stronger El Nino, pose additional risks to global food inflation.

Stakeholders, including research houses and analysts, have expressed their views on the inflation outlook, with most expecting BNM to keep the OPR unchanged at 2.75% throughout 2026. According to Kenanga Research, the central bank is expected to look through temporary supply-driven price shocks unless they evolve into broader second-round inflation effects.

The research house added that the current trends suggest BNM has sufficient room to maintain a steady monetary policy stance, supporting the country's economic growth and stability.

Looking ahead, Malaysia's inflation outlook is expected to remain stable, with research houses predicting that the country's fiscal policy and diversification of hydrocarbon supply will continue to support price stability. However, the ongoing geopolitical and energy market uncertainties will require close monitoring, as they could potentially impact the country's inflation rate and overall economy.

With the current macroeconomic conditions supporting a prolonged pause in the OPR, Malaysia is expected to maintain its stable monetary policy stance, supporting the country's economic growth and stability in the face of external uncertainties.