KUALA LUMPUR (March 19): The conflict in the Middle East, which threatens oil and fertiliser flows, raises the risk of higher-than-expected inflation, but the domestic situation remains anchored by subsidies, according to economists.
Headline inflation eased to 1.4% year-on-year in February, below the 1.6% notched in January and Bloomberg's consensus of 1.6%.
Inflation is expected to remain manageable and below the long-term average of 2%, RHB Research said, supported by orderly policy implementation and the absence of excessive demand pressures.
That said, the research house noted that risks are tilted to the upside as escalating geopolitical tensions in the Middle East exert upward pressure on global energy prices, with potential pass-through to inflation if the surge in crude oil price persists.
Malaysia’s subsidies — RON95 petrol, diesel and electricity — are keeping its impact anchored for the time being, economists noted.
Under current subsidies, UOB projects that every US$10 per barrel rise in benchmark Brent crude may raise inflation by 0.2%. Prime Minister Datuk Seri Anwar Ibrahim previously noted the country’s supply is secure until May, with the government committed to keeping subsidised RON95 at RM1.99 per litre.
However, an upward adjustment to subsidised RON95 price and electricity rates may raise the Brent impact on inflation by threefold. In this scenario, headline inflation is projected to rise by 0.6% to 1% for every US$10 per barrel increase in Brent, UOB said.
“Nevertheless, the broader spillover effects of the conflict on commodity markets, including food, as well as transport services, postage and other channels are expected to exert upward pressure on inflation from March onwards should the conflict persist,” it added.
The price of Brent crude oil hit a high of US$118.65 on Thursday (March 19) after attacks on Mideast energy assets multiplied, in a major escalation in the war between US-Israel and Iran.
Aside from energy price concerns, the Strait of Hormuz is also a critical chokepoint for global agriculture, with one-third of the world's traded fertiliser passing through it.
Higher input costs, Kenanga Research said, are likely to lift prices for staples such as rice, poultry and vegetables.
“While fiscal transfers continue to support demand, rising transport and farming costs will erode affordability,” it noted.
“If producers pass on these costs to consumers, private consumption, Malaysia’s main growth engine, may soften,” Kenanga Research added.
Kenanga Research raised its inflation forecast for 2026 to 2.1% from 1.9% previously, noting cost pass-through inflation from the Middle East conflict. RHB Research kept its projection for the year at 1.8%, while UOB stood pat on its 2% forecast.
In balancing inflation and economic growth, all three research houses expect Bank Negara Malaysia (BNM) to keep the overnight policy rate (OPR) at 2.75%.
“We expect the central bank to tolerate moderately higher headline inflation, to safeguard growth, while a firmer ringgit helps cushion imported cost pressures. In this environment, the policy rate will act mainly as a stabiliser against external volatility,” Kenanga Research said.
The central bank’s next decision on the benchmark is slated on May 7.