KUALA LUMPUR (Nov 21): Economists expect Malaysia’s inflation outlook to remain contained amid implementation of the Budi95 petrol subsidy and softer global commodity trends.

RHB Research, Kenanga Research and UOB Global Economics & Markets Research are projecting full-year inflation of between 1.4% and 1.5% — within the Finance Ministry (MOF)’s 1%-2% forecast range.

Malaysia’s consumer price index (CPI) rose 1.3% year-on-year (y-o-y) in October, slower than September’s 1.5% expansion.

As October’s inflation undershot expectations, Kenanga has lowered its 2025 inflation forecast to 1.4% from 1.5%, due to the deflationary effect of the Budi95 petrol subsidy. It expects deflationary pressure on the transport component to persist. 

“The moderation [in CPI] was not expected…The Budi95 scheme continues to dominate actual consumption: households make up 78% of RON95 use (MOF estimates), and October’s CPI suggests an even larger share is buying at subsidised price,” Kenanga Research explained, adding that the prospects of softer global oil prices over the coming months could also push transport inflation lower.

Having said that, the research house remains alert to potential second-round effects, particularly higher operating costs for firms not eligible for the Subsidised Petrol Control System (SKPS) programme and the broader pass-through from the higher sales and service tax (SST) rate.

In September, the Ministry of Domestic Trade and Cost of Living announced that nine categories of public land transport vehicles are eligible to apply for the SKPS programme, namely taxis, rental cars, school buses, hearses, ambulances, the fire brigade, shuttle buses, stage buses and minibuses.

UOB and RHB highlighted that subdued commodity prices, steady domestic demand and manageable policy-related cost adjustments are likely to support a stable inflation environment next year.

UOB kept its 2025 inflation projection at 1.4%, but expects it to rise to 2% in 2026 — still within the upper bound of the MOF projection of 1.3% to 2%. The forecast is premised on the expectation that the manageable pass-through of the ongoing domestic fiscal reforms and global tariff-induced costs, as well as the absence of excessive demand pressures amid a stable domestic growth and a firmer ringgit outlook.

The full impact of the expanded SST, Budi95, e-invoicing and global tariff rates is expected to be realised in 2026, UOB noted.

“Based on channel checks, the pass-through effects from a multi-tier foreign worker levy mechanism and carbon tax set to be implemented in 2026, are assessed to be manageable for now,” it added.

Meanwhile, RHB maintained its 2025 inflation forecast at 1.5%, noting that the recent 3% cut in RON95 pump prices to RM1.99 per litre may shave 0.1-0.2 percentage points off full-year inflation.

The research house expects 2026 inflation to trend higher to 1.8%, driven by steady investment activity, resilient consumption and expansionary fiscal measures.

Given the benign inflation trend, optimistic domestic outlook, subdued commodity prices and easing global tariff risks, the overnight policy rate is likely to be maintained at 2.75% throughout 2026, UOB said.

The next Monetary Policy Committee meeting will be held on Jan 22, 2026.