KUALA LUMPUR (June 24): Malaysia’s inflation is expected to remain benign for the rest of 2025, despite the upcoming subsidy reforms and a broader sales and service tax (SST) implementation, according to economists.
The economists from four research houses expressed this view after the release of official data on Tuesday showing that headline inflation in May cooled to 1.2% year-on-year, the slowest pace since February 2021. The rate was also below the median 1.4% rise predicted in a Bloomberg poll.
The research houses — UOB, RHB Investment Bank, CIMB Investment Bank and Kenanga Research — concurred that inflationary pressures are expected to stay moderate as cost-push impacts from policy adjustments are likely to be gradual and well-contained.
“We believe demand-side price pressures will remain contained,” CIMB said in a note, adding that the electricity tariff reforms set to begin in July would likely have a marginally disinflationary effect.
CIMB expects the full-year consumer price index (CPI) impact from electricity tariff adjustments to be slightly below -0.1 percentage point, noting that “85% of residential users — equivalent to around 7.7 million households — consume less than 600 kWh, making them eligible for the full charge waiver and reinforcing the disinflationary bias.”
UOB revised its full-year inflation forecast downward to 1.8% from 2.3% previously, also pointing to minimal direct impact from the expanded SST and new electricity tariff framework.
"However, we remain vigilant to any second-round or pass-through effects from recent policy changes and will reassess once the RON95 fuel subsidy rationalisation mechanism, due in 2H2025, is unveiled," it cautioned.
Kenanga also revised its forecast lower to 2.0% from 2.7% previously, following headline inflation averaging 1.5% in the first five months of the year.
The research house projects that inflation will climb gradually in the second half of the year, peaking between 2.4% and 3.0% after subsidy and tax reforms are rolled out.
"Further upward pressure is likely in August from targeted RON95 fuel subsidy cuts, though the immediate impact may be limited to a narrow segment of the population," Kenanga said.
"Risks remain skewed to the upside, mainly from tariff uncertainty and geopolitical tensions," it added.
Rate cut or pause?
While most economists see limited inflationary impact from policy reforms, opinions diverge on Bank Negara Malaysia’s (BNM) monetary policy trajectory. UOB and CIMB both flagged the possibility of a 25 basis point rate cut of the overnight policy rate (OPR) in July, citing weak trade performance and subdued inflation.
“Higher downside risks to growth raise the odds for pre-emptive rate cuts to ensure economic stability,” UOB wrote, maintaining its forecast for two rate cuts this year of 25 basis points (bps), in July and November.
CIMB echoed the view of a rate cut in July, citing subdued inflation trends and weak external trade.
"We maintain our call for BNM to cut the OPR by 25 bps to 2.75% at the upcoming July MPC (Monetary Policy Committee) meeting to support growth. However, a delay to Sept 4 would imply that BNM may prefer to assess additional key upcoming data, including 2Q2025 advanced GDP (July 18), June trade data (July 18) and July trade data (Aug 18)," it said.
RHB, however, sees the OPR remaining at 3.00%, barring a sharp deterioration in GDP growth. “If GDP growth falls below 4.0% and impacts domestic demand and the labour market, we do not rule out a 25 bps OPR cut in 2H2025,” it said.
Kenanga, meanwhile, expects BNM to stay pat, citing resilient economic growth and the appeal of Malaysia’s interest rates to foreign investors.
"The current rate level continues to attract foreign capital into the bond market. That said, should growth fall below 3.5% and sequential quarter-on-quarter GDP prints turn negative, the case for a rate cut would strengthen," it added.