UOB economists Julia Goh and Loke Siew Ting note Malaysia’s May headline inflation rose to 2.0% year-on-year, the highest since July 2024, driven by Food, Housing, Utilities and Transport. Year-to-date inflation of 1.7% supports their full-year 2.0% forecast. They highlight supply-side shocks from the Middle East conflict and El Niño, but expect Bank Negara Malaysia to keep the Overnight Policy Rate at 2.75% through 2026.

Inflation risks but policy steady

"Year-to-date (ytd) inflation of 1.7% over Jan–May 2026 supports our full-year forecast of 2.0% (BNM est: 1.5%–2.5%; 2025: 1.4%). While the preliminary US–Iran peace MOU may help ease tensions in the Middle East, cost pressures are likely to remain elevated in the near term."

"Additionally, the onset of El Niño from Jun 2026 to mid-2027 is expected to lift crop prices, posing upside risks to inflation, despite continued fuel subsidies contingent on oil prices remaining below USD200/bbl."

"With core inflation continuing to ease—indicating softer domestic demand—alongside manageable headline inflation given ongoing subsidies and lower global energy prices contingent on easing oil supply security risks, Bank Negara Malaysia (BNM) will likely maintain a watchful hold on the key policy rate, while remaining attentive to evolving external risks and adjusting policy settings as necessary."

"In summary, prevailing price pressures remain largely driven by supply-side factors, while the continued moderation in core inflation points to softening domestic demand conditions."

"Hence, we keep our view that the Overnight Policy Rate (OPR) will be held steady at 2.75% through the year."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)