Opinion: Overnight policy rate is limited in function

KUALA LUMPUR, 7 AUGUST 2026 —

Bank Negara Malaysia left the overnight policy rate at 2.75% after its June 2026 meeting, while producer prices climbed 9.2% year-on-year and consumer inflation stayed flat at 1.9%.

The mismatch reflects subsidies and cash aid that have absorbed cost increases that would otherwise have reached consumers months ago, Bank Negara said.

The subsidy bill reached RM35–40 billion in 2025 and is projected to climb to RM58.4 billion in 2026, with an additional RM7 billion a month now required for RON95 petrol and diesel alone due to the Middle East crisis.

Direct cash assistance to households is also set to rise to RM15 billion in 2026, the largest commitment on record, the finance ministry said.

Producers may be using older, cheaper raw material stocks, delaying the full impact on prices, but this buffer is temporary once fresh inventory is purchased at current higher costs.

Alternatively, manufacturers could be trimming margins to protect market share, yet this is unsustainable over time.

Ultimately, the divergence risks deeper distortions if left unaddressed, the central bank warned.

Two outcomes can close the gap: producer prices must fall, or consumer inflation must rise to match them.

Within its mandate, Bank Negara can still influence consumer prices via the OPR, which steers liquidity and spending patterns, but it cannot control producer prices driven by global supply chains, geopolitical risks and volatile oil and mineral prices.

Raising the OPR could indirectly support the ringgit and lower import costs, yet such a move would also risk slowing domestic activity, so it must be used sparingly.

The central bank will monitor whether producers eventually pass higher costs to consumers, which could reignite inflation and give the OPR a clearer role in adjustment.

Beyond monetary policy, Malaysia needs structural fixes to curb producer inflation.

Raising productivity across construction and manufacturing—where the index stands at 1.4%—would expand production capacity, lower per-unit costs, and make exports more competitive.

A stronger ringgit, supported by higher productivity and steady foreign capital inflows, would further ease import costs and help anchor producer prices.

None of this can occur without stronger investor confidence, anchored in visible anti-corruption efforts, transparent governance and strict fiscal discipline.

Reforms in these areas would improve Malaysia’s risk profile, lift credit ratings, and reduce borrowing costs.

For now, the OPR remains the right tool to keep consumer inflation in check.

Related: Bank Negara Malaysia