This article first appeared in The Edge Malaysia Weekly on March 23, 2026 - March 29, 2026

INFLATION is beginning to spark concerns again globally, as the Iran war — in its third week with no signs of de-escalation at the time of writing — keeps crude prices elevated at US$100 a barrel levels and freight charges climb.

In Malaysia, inflation is still expected to remain under control, thanks to heavily subsidised RON95 petrol that is enjoyed by Malaysians.

But, whether or not inflation overshoots the official headline forecast of 1.3% to 2% in 2026 depends on how protracted the war is.

“The extent of the upside risk depends on the period and persistence of elevated global oil prices,” says OCBC senior Asean economist Lavanya Venkateswaran.

Based on her estimates, about 12.2% of Malaysia’s Consumer Price Index (CPI) basket, through direct and indirect mechanisms, is exposed to higher oil and gas prices.

“Should global oil prices remain elevated and average US$84/bbl in 2026, headline CPI would average 2.7% year on year (y-o-y) versus our baseline of 1.5% — assuming that subsidies cushion about half the impact compared with a direct pass-through onto retail fuel prices,” she says.

CGS International Securities (CGSI) economist Ahmad Nazmi Idrus, however, believes that only when present conditions change, such as if the government revises fuel subsidies, would inflation exceed the official target.

“It is difficult to commit to a revision to our inflation forecast because things are still very fluid at the moment. However, we did work out a few assumptions. If Brent stays at US$85/bbl for the rest of the year, annual inflation could increase by 15 basis points (bps). If it is at US$100/bbl, [annual inflation] would jump by 20bps to 30bps.

“If this is the case, then it is likely that inflation can still stay within the official forecast of 1.3% to 2%,” he says, adding that the research house’s base CPI estimate is 1.5% y-o-y for 2026 before taking into account the oil shock.

Nazmi adds that he is not expecting a “Covid reopening” level of inflation as the supply issue seems to be concentrated in the oil and gas sector and not widespread at the moment.

In 2022, following the reopening of the economy after the pandemic, the Russia-Ukraine military conflict sent global energy and commodity prices surging at a time when supply chains had yet to find their normalcy post-pandemic.

Malaysia’s headline inflation increased to 3.3% in 2022 from 2.5% in 2021 as higher inflation on food and non-alcoholic beverages drove the increase in headline inflation.

Lavanya observes that while Malaysia did see inflationary pressure pick up in 2022, it was at a significantly lower degree compared with regional peers and the increase implied by global oil prices.

However, she points out that there are two crucial differences now since 2022.

“Fuel subsidies are no longer blanket subsidies as in 2022. The rationalisation from Sept 22, 2025 under Budi95 has exposed the headline CPI to some additional fluctuations. Second, electricity tariff rationalisation from July 2025 allows for an automatic fuel adjustment (AFA) mechanism of 10% from the current allowed generation tariff of 45.40sen/kWh,” she notes.

She adds that these changes were delivered well enough to keep headline CPI contained at an average 1.4% y-o-y in 2025 versus 1.8% in 2024. While the research house’s baseline forecast for 2026 is 1.5%, she says the risks to this have risen since this assumes relatively flat oil prices compared with 2025.

Still, Nomura research analyst Euben Paracuelles opines that the inflation impact would be more manageable for Malaysia compared with other countries because of the fuel subsidies, especially for RON95.

He is estimating inflation to increase moderately to 2.2% from 2.1% previously based on the research house’s revised forecast where the average crude oil price sits around US$86/bbl for the full year.

In recent weeks, Prime Minister Datuk Seri Anwar Ibrahim has said subsidised RON95 petrol would be maintained for the foreseeable future at RM1.99 a litre. Nevertheless, the pump price for unsubsidised RON95 petrol has increased 60 sen to RM3.27 per litre, while RON97 petrol increased 60 sen to RM3.85 per litre. Unsubsidised diesel now retails at RM3.92 per litre in Peninsular Malaysia, an 80 sen increase.

Notably, 69% of Malaysia’s crude petroleum and condensate imports came from the Middle East in 2025.

Petroliam Nasional Bhd (PETRONAS) said in a recent statement that mitigation measures have been put in place to support supply continuity, among which includes securing additional crude supply from West Africa and Latin America to reduce dependency on any single shipping route.

It is also preparing the PETRONAS chemical refinery in Pengerang to help balance gasoline and jet fuel demand as crude oil feedstock becomes available.

The national oil company has also assured the public that it is working closely with the government and industry players to monitor the evolving situation and protect Malaysia’s energy security.

Under the current circumstances, the best-case scenario for CGSI’s Nazmi is where disruption to the Strait of Hormuz is short, allowing the government to maintain the fuel subsidy and a benign spillover effect on food and services.

“Then, I would keep the inflation forecast unchanged,” he states.

Lavanya agrees that a faster resolution would mean the impact on inflation will “hit in March and then fade in the coming months”.

In the worst-case scenario, Nazmi estimates that inflation could rise as much as 3% y-o-y, if there is a prolonged disruption, and crude prices could hover around US$100 to US$150 a barrel for an extended period of time. This would result in fiscal deterioration and widespread price increases.

If the war were to be prolonged, UOB Malaysia senior economist Julia Goh says the government would likely need to pivot towards flexible policy adjustments.

“However, we think the government will still maintain some policy cushioning such as maintaining the subsidised RON95 petrol and price controls on essential goods, to support the economy,” she comments.

Nazmi points out that the government could also move to reduce the allocation for the subsidised RON95 petrol in the event crude oil prices stay elevated for an extended amount of time.

He views this as a better option than revising RON95 petrol prices, saying that reducing the allocation would keep inflation muted while petrol prices remain affordable for the poor who typically do not consume much.

On average, those who qualify for the subsidised RON95 petrol utilise just below 100 litres of petrol per month.

At this juncture, economists take the view that Bank Negara Malaysia will continue to keep rates unchanged for the rest of the year.

“The tension between growth and inflation will become greater should the conflict in the Middle East remain prolonged,” says Lavanya, who is of the view that Bank Negara will maintain the key rate at 2.75% for the rest of the year, her caveat being a significant deterioration in the fluidity of the situation.

Meanwhile, Nazmi, who also expects a pause in the overnight policy rate (OPR) for the year, says the central bank’s monetary response to oil shocks is historically measured and delayed, relying more on fiscal buffers than immediate rate changes.

“Even if there are inflationary pressures, Bank Negara avoids overreacting if it is purely cost-push and transitory. Only when there are signs of inflation permeating (such as rising core inflation) that the bank would steer to hiking the interest rates. So, I don’t think there will be a reaction by the central bank fairly soon,” he opines.

Lee Heng Guie, executive director of the Socio-economic Research Centre under the Associated Chinese Chambers of Commerce and Industry of Malaysia, says lowering interest rates during an oil shock to support growth and boost aggregate demand could lead to “demand-pull” inflation, potentially compounding existing cost-push pressures from higher energy prices and risking elevating inflation.

Nomura’s Euben, who sees Malaysia’s growth increasingly investment-led and a net beneficiary to rising energy prices, opines that Bank Negara will likely normalise monetary policy to pre-empt financial imbalances — being the possible increase in borrowing across sectors if interest rates stay too low for too long. His forecast is for a 25bps hike to the OPR this year to 3%.

In the March 5 Monetary Policy Committee Meeting (MPC), the central bank left the OPR unchanged at 2.75%. The MPC statement acknowledged the uncertainties from the ongoing conflict in the Middle East, adding that the impact to the world and the Malaysian economy will depend on how these developments evolve.

However, it reiterated that the Malaysian economy is facing these challenges from a position of strength, with robust domestic growth, moderate inflation, a sound financial sector and resilient external position. 

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