KUALA LUMPUR (Jan 22): Malaysia’s inflation is expected to reverse its current downtrend and gradually rise from mid-2025, driven by subsidy rationalisation, tax adjustments, and wage increases, according to economists.

Malaysia’s inflation trajectory, they said, depends heavily on the effective implementation of domestic reforms and the evolving global economic landscape.

As the nation braces for fiscal consolidation and external volatility, policymakers face the challenge of balancing cost pressures with sustainable growth, said the economists.

UOB Global Economics and Markets Research expects inflation to rise from an average of 1.8% in 2024 to 2.3% in 2025, reflecting a range of domestic and external factors.

"We see this current inflation downtrend short-lived, and expect it to revert upwards gradually by the middle of this year...this is in view of potential spillover effects from higher taxes and wages, base effects, as well as volatility in global commodity prices and foreign exchange (forex) markets," UOB said in a note on Wednesday.

The research firm noted that its inflation forecast had yet to factor in the impact of fuel subsidy rationalisation. The government announced in Budget 2025 that this will be implemented in mid-2025.

The removal of blanket RON95 petrol subsidies is expected to exert upward pressure on prices, although Prime Minister Datuk Seri Anwar Ibrahim has assured that the subsidies will still benefit 85% of Malaysians, with mitigating measures in place to address cost pressures.

“In addition to fuel subsidy removal, the government is also planning to rationalise food-related subsidies, such as for eggs, local white rice, and cooking oil, without providing further details at this juncture,” UOB added.

Other domestic factors include a sugar tax hike in January, higher minimum wages starting in February, the implementation of a broader sales and service tax (SST) in May, and mandatory Employees Provident Fund (EPF) contributions for foreign workers.

On the global front, volatility in commodity prices and forex markets, along with base effects from 2024, are expected to compound inflationary pressures. UOB also highlighted broader geopolitical and economic uncertainties.

“Rising external uncertainty from Trump’s second presidency in the US, China’s growth prospects, and geopolitical tensions continue to suggest a cautious stance by BNM,” it said.

Despite this inflation outlook, UOB expects Bank Negara Malaysia (BNM) to keep the overnight policy rate (OPR) steady at 3% throughout 2025, similar to 2024, citing stable economic fundamentals and the latest data.

Earlier on Wednesday, the Department of Statistics Malaysia said inflation in Malaysia eased slightly and was marginally slower than expected in December, as prices of non-food items and services rose at a more moderate pace.

The consumer price index (CPI) — Malaysia’s main gauge of inflation — rose 1.7% in December from a year earlier, bringing the average annual inflation rate to 1.8% in 2024, slowing for the second consecutive year.

BNM also announced on Wednesday its decision to keep the OPR at 3%. The benchmark interest rate has been kept at this level since May 2023, when the central bank increased the rate by 25 basis points from 2.75%.

Kenanga Research, meanwhile, has projected a higher inflation rate of 2.7% for 2025, pointing to the mid-year removal of blanket fuel subsidies as a key driver.

“We maintain our 2025 inflation forecast, factoring in the expected June-July removal of [blanket] RON95 subsidies, which could push inflation higher as petrol comprises 5.5% of the CPI basket,” said the research house.

It said additional inflationary pressures will stem from higher electricity tariffs, rising insurance premiums, and wage-price pass-through effects linked to the new minimum wage.

On the external front, Kenanga flagged risks tied to global trade disruptions stemming from US President Donald Trump’s protectionist policies.

“Trump’s proposed tariffs — targeting the European Union, China (a 10% duty by February), and Mexico/Canada (25% import taxes) — could impact global trade. Malaysia’s electrical and electronics sector remains vulnerable to this spillover,” it said.

Despite these pressures, Kenanga, like UOB, expects BNM to maintain the OPR at 3%, given the stable inflation trajectory and resilient growth outlook.

“We expect the OPR to remain at 3% in 2025, but remain watchful for potential inflation shocks or downside risks to growth that could warrant a policy shift,” the research house noted.

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