KUALA LUMPUR (Oct 24): The government’s plan to implement targeted subsidies for RON95 petrol by mid-2025 is expected to push inflation higher, with Allianz forecasting Malaysia’s inflation to reach 2.9% in 2025, up from its estimated 2.3% in 2024.

The Ministry of Finance (MOF) forecasts the consumer price index (CPI) — Malaysia’s main gauge of inflation — to rise 2% to 3.5% in 2025, compared with the 1.5% to 2.5% forecast for 2024. At 3.5%, it will be the highest level since 2017 when the country was implementing goods and services tax.

The subsidy rationalisation for RON95 petrol will have a significant pass-through effect on sectors like food and transport, which are crucial to household spending, as both food and transport are major components of household budgets in Malaysia, Allianz SE's chief economist Ludovic Subran told the media during an economic outlook briefing.

“In smaller economies like Malaysia, inflationary pass-through tends to be stronger,” said Ludovic.

Subran said that given an oligopolistic market, businesses are unlikely to absorb costs, and instead, they may pass the full burden onto consumers to maintain margin.

The planned targeted subsidies for RON95 petrol would let the wealthiest 15% paying the market rate for RON95 petrol while the remaining 85% of the population will continue to be subsidised.

The MOF has projected to fork out RM52.76 billion for subsidies and social assistance in 2025, down 14.37% from a revised RM61.39 billion in 2024. Nonetheless, the government’s RM52.76 billion allocation for subsidies and social assistance in 2025 remains elevated compared to the 10-year moving average of RM39.45 billion.