Malaysia’s central bank chief signals room to act as inflation risks rise

KUALA LUMPUR – Malaysia’s central bank has greater room to adjust interest rates after changing its policy guidance in September and stands ready to act if inflation pressures intensify as the Middle East conflict keeps energy prices elevated, its governor said.

“We are very vigilant in terms of looking at the price increases,” Bank Negara Malaysia (BNM) Governor Abdul Rasheed Ghaffour said in an interview with Bloomberg TV’s Avril Hong on Oct 15. “We do have space for us to act accordingly,” if price pressures rise, he said. 

BNM kept its benchmark interest rate at 2.75% at its last meeting in September, while dropping its previous description of the policy stance as “appropriate,” a change Rasheed said gives the central bank greater room to respond if needed. 

Investors interpreted the change as opening the door to a potential rate increase. In the swaps market, traders were pricing in on Oct 15 about a 76% probability of a rate hike by BNM within the next six months, according to data compiled by Bloomberg.

“That’s what the market is saying,” Rasheed said on the sidelines of the International Monetary Fund and World Bank meetings in Bangkok.

Policy decisions will remain data-dependent, he said, with the monetary policy committee assessing the latest information at each meeting. The current rate remains consistent with the outlook for inflation and sustainable economic growth, he added.

Despite a surge in global oil prices fuelled by the Middle East war, inflation in Malaysia has remained moderate, helped in part by government subsidies that keep fuel prices among the lowest in the world.

Malaysia’s position as a net energy exporter, supported by its oil and natural gas reserves, has also helped shield the economy from higher import costs confronting energy-dependent neighbours such as Thailand and the Philippines.

The government expects inflation to average 1.5%-2.5% in 2026, after consumer prices rose 1.9% in August from a year earlier. Rasheed said inflation will hold within the forecast range, but there are risks from a prolonged Middle East conflict and elevated energy prices.

Inflation is expected to pick up in early 2027 as higher energy, food and other input costs feed through to prices, before easing later in the year, according to the government. It forecasts inflation of 1.8%-2.8% in 2027.

Strong domestic demand and a boom in semiconductor exports have helped cushion Malaysia from disruptions caused by the US war against Iran, reinforcing expectations that it will remain among South-east Asia’s fastest-growing economies in 2026.

The government last week raised its 2026 growth forecast to 4.8%-5.3% from 4%-5%, as resilient domestic demand and surging exports help offset a challenging global environment. It expects the economy to expand 4.2%-5.2% in 2027, supported by sustained domestic demand and investment.

Economic expansion will come in at around 5% in 2026 as Malaysia’s diversified sources of growth will sustain the economy, Rasheed said. He acknowledged risks of a slowing artificial intelligence boom but said demand for the nation’s electrical and electronics products would remain strong.  

“In our engagement with the businesses, with the MNCs that produce these products, you see the order book has grown from about six months, five months ago, to now between 12 to 18 months” he said. “So that shows that there’s strong demand for these products.”

While Malaysia, as a small and open economy, would be affected by a prolonged conflict in the Middle East, its diverse sources of growth and broad range of trading partners could help cushion the impact.

The ringgit has remained steady in 2026 even as the Indonesian rupiah and Philippine peso hit record lows. The Malaysian currency has edged up about 0.6% against the dollar after emerging as the top performer in Asia in 2025, with a gain of 10%. 

The currency has remained “resilient,” with a “very healthy two-way flow” in the market, Rasheed said. BNM continues to encourage business, exporters and investors to repatriate and convert their foreign-currency income, he said.

Malaysia’s bonds have recently traded in a more volatile manner. The gap between the highest and lowest yield on the 10-year benchmark in September and October ranged between 23-27 basis points. In comparison, the average of this gap in the first eight months of 2026 was around 10 basis points.

The outlook for Malaysian bonds will depend largely on global developments, including the duration of the Middle East conflict, inflation and fiscal risks in the US, Rasheed said. While Malaysian yields have adjusted to the changing environment, the moves have been orderly, which remains the central bank’s main focus, he said.

The governor said Malaysia’s resilient growth, strong fundamentals and policies were attractive to investors, even as a general election looms. Nationwide polls are not due by February 2028 but Prime Minister Anwar Ibrahim is said to be considering snap elections in the second half of 2027.

“As long as policy consistency is there, policy continuity is there, the fundamental is strong, income policy supports growth and friendly to the investors, that’s what they’re looking for,” Rasheed said. BLOOMBERG