KUALA LUMPUR, July 17 — Malaysia's inflation is expected to remain manageable in 2026, with economists maintaining their forecasts at 1.8-2.0 per cent as targeted fuel subsidies, stable domestic demand, and contained external price pressures help anchor inflation.
Bank Negara Malaysia (BNM) is also expected to keep the overnight policy rate (OPR) unchanged at 2.75 per cent for the remainder of the year.
AmBank Group chief economist Firdaos Rosli maintained the bank's 2026 inflation forecast at 2.0 per cent, expecting price pressures to strengthen in the second half of the year and peak in the fourth quarter.
He said the June Consumer Price Index (CPI) reading of 1.9 per cent, slightly below AmBank's forecast of 2.0 per cent, reinforced the view that inflation remained supported by firm domestic demand, aided by the targeted fuel subsidy programme under Budi Madani.
However, consumption remained insufficient to trigger demand-pull inflation.
The softer June inflation reading was mainly due to slower price increases in the transport, personal care, social protection, miscellaneous goods and services, and education groups.
Meanwhile, inflation in the food and beverages group, which carries the largest weight in the CPI basket, remained unchanged at 1.4 per cent.
Looking ahead, Firdaos expects inflation to accelerate in the second half of 2026, driven by a low base effect from the corresponding period last year and the delayed pass-through of higher raw material and transportation costs.
He also cautioned that potential weather disruptions caused by El Nino could exert upward pressure on food prices later this year.
On external risks, prolonged conflict in West Asia remained the key factor that could trigger supply disruptions, although the impact on consumer prices was likely to remain limited due to the BUDI Madani targeted fuel subsidy mechanism.
"Inflationary pressure is likely to be felt more by businesses than consumers amid the rise in the producer price index since March 2026," Firdaos told Bernama.
He also expects BNM to maintain the OPR at 2.75 per cent for the rest of the year, supported by resilient domestic economic conditions, including stronger growth prospects, a stable labour market, and healthy loan growth.
On the government's work-from-home (WFH) initiative, the measure may have some impact but is unlikely to meaningfully alter the inflation trajectory.
"I think the idea behind the initiative is to somewhat limit fuel consumption, rather than to manage inflation," Firdaos said.
Meanwhile, Bank Muamalat Malaysia Bhd maintained its 2026 CPI forecast at 1.8 per cent, expecting targeted subsidies and price-control measures to continue cushioning consumers against external price pressures, particularly higher global fuel prices.
Its chief economist Mohd Afzanizam Abdul Rashid said the continued implementation of targeted fuel subsidies, including the expansion of the MyKad-based subsidy distribution mechanism to diesel, should help contain inflationary pressures.
"We believe the policies on subsidies and price controls will remain in place, thereby insulating Malaysians from the impact of higher fuel prices," he said.
Afzanizam noted that easing fuel prices had already contributed to softer inflation in June, with the transport sub-index moderating to 2.8 per cent from 3.8 per cent in May.
From a monetary policy perspective, the current interest rate setting remained sufficiently restrictive, with the real interest rate — measured by the OPR less inflation — standing at 0.85 per cent, above the long-term average of 0.70 per cent.
"On that note, we do not think BNM will change the OPR this year. Clearly, the prevailing OPR level provides the right support to the economy, and the 25-basis-point 'insurance' cut in July last year has served its purpose," he said.
Accordingly, Bank Muamalat also expects the OPR to remain at 2.75 per cent for the rest of 2026.
On the WFH initiative, Afzanizam said the measure could reduce commuting time and travelling costs, with technology enabling some employees to perform their jobs almost seamlessly through online meetings and instant decision-making.
Recently, Chief Secretary to the Government Tan Sri Shamsul Azri Abu Bakar said the WFH initiative, implemented for civil servants since mid-April, had saved the government RM7.31 million in petrol subsidy expenditure.
The initiative also reduced fuel consumption by 4.05 million litres over the three months since its nationwide implementation, benefiting about 659,000 civil servants.
