Bank Negara Malaysia is widely expected to hold its overnight policy rate (OPR) at 2.75 per cent when the central bank's monetary policy committee meets this Thursday, according to research from CIMB Treasury and Markets Research. The projection reflects a softening in inflation risks following the United States-Iran ceasefire, which has eased global crude oil prices and reduced upward pressure on domestic fuel costs.
CIMB Treasury has revised down its inflation forecast in light of these international developments. The easing of Brent crude oil prices, combined with more favourable crack spread trajectories in the global refining sector, has shifted the outlook for Malaysia's price environment. The BUDI Diesel programme, which provides subsidised diesel at set price points, is expected to provide additional relief on the inflation front. The research house calculates that lower subsidised diesel prices will contribute between seven and eight basis points of disinflationary pressure to headline inflation over the coming months, a meaningful buffer against broader price increases.
Despite the improved near-term inflation picture, CIMB Treasury cautioned that second-round inflation effects—where initial price shocks transmit through the broader economy via wage pressures and input cost pass-throughs—remain a concern that policymakers cannot ignore. The central bank's decision to pause will need to balance the temporary relief from energy prices against these lingering structural risks. Recent inflation data shows that price pressures have been concentrated primarily in fuel and electricity segments, while other consumer price components have remained relatively stable. This pattern suggests that imported cost shocks have not yet triggered widespread price adjustments across the economy, a positive sign for monetary policymakers.
However, the research house flagged that second-round effects could still add between 60 and 70 basis points to food and core inflation over the next three quarters. This forecast is grounded in producer price index data, which reveal an important shift in the composition of cost pressures facing Malaysian manufacturers and suppliers. Crude fuel-related cost pressures, which dominated early in recent inflation episodes, have largely subsided as a driver of producer inflation. In their place, intermediate manufacturing inputs have emerged as a persistent month-on-month driver of producer-level price movements.
This transition from crude material costs to intermediate goods inflation carries important implications for the transmission of price shocks through the supply chain. When manufacturers face rising input costs for intermediate goods—such as processed materials, components, and semi-finished products—they face stronger incentives to pass these costs on to the next stage of production or to final consumers. The data suggests such pressures are beginning to accumulate, creating latent upside risks to inflation that may not be immediately visible in consumer price statistics but could materialise over coming months. This dynamic explains why CIMB Treasury maintains a cautious stance despite near-term relief from energy prices.
CIMB Treasury's analysis draws on historical patterns of monetary policy decisions, noting that past OPR increases that occurred outside formal tightening cycles typically coincided with specific economic conditions. Those rate moves occurred when Malaysia was achieving gross domestic product growth exceeding five per cent while headline inflation hovered around or above three per cent. Such combinations signal an overheating economy requiring monetary restraint to cool demand and bring inflation under control. The research house emphasises that neither of these conditions prevails in the current environment.
The growth outlook for Malaysia remains uncertain, though there are modest signs of potential upside from the export sector. Inflation, while easing from recent peaks, still requires careful monitoring rather than immediate policy relaxation. Against this backdrop, the case for holding rates steady is compelling. A rate pause allows the central bank to maintain its flexibility to respond if either growth strengthens materially or inflation proves more persistent than currently expected. It also avoids unnecessary policy moves that could complicate future rate adjustments if conditions shift unexpectedly.
Inflation therefore remains the principal source of uncertainty in BNM's policy calculus, according to CIMB Treasury's assessment. The central bank faces a situation where the immediate inflation threat from energy prices has diminished, yet the seeds of potential future price pressures through second-round effects are being planted in producer data. This nuanced situation calls for patience rather than aggressive action. Holding the OPR steady signals confidence in the disinflationary trajectory while preserving room to respond if the outlook darkens.
For Malaysian businesses and consumers, a pause in rate decisions offers continued predictability in borrowing costs at a time when growth momentum remains fragile. Banks and financial institutions can adjust their own rates at their own pace rather than facing immediate margin compression from further central bank moves. For policymakers managing the broader economy, the breathing room allows them to assess whether the BUDI Diesel programme and oil price moderation deliver the expected inflation relief, and whether producer price pressures genuinely begin to moderate in coming months. This measured approach reflects the complexity of navigating monetary policy when multiple risk factors are in play simultaneously.
