This article first appeared in The Edge Malaysia Weekly on June 22, 2026 - June 28, 2026
PUTRAJAYA probably breathed slightly easier as Brent crude oil slipped below US$80 per barrel after the US and Iran signed an interim deal on June 18 that allowed the reopening of the Strait of Hormuz, while Washington and Tehran work out a final agreement within 60 days. Brent crude remained just under US$80/bbl at the time of writing, despite reports that Israel’s continued attacks in southern Lebanon delayed US-Iran talks in Switzerland last weekend.
Yet, the ringgit was among the emerging market currencies that skidded the most against a stronger US dollar last week as bond traders and money markets adjusted to a seemingly more hawkish US Federal Reserve. The shift followed remarks by its new chairman, Kevin Warsh, who emphasised combating inflation at his first press conference after the Federal Open Market Committee (FOMC) meeting.
US Treasury yields rose last week, with Bloomberg data pointing to bets on possible US interest rate hikes by end-October. This followed the FOMC’s June “dot plot”, which showed nine rate setters expecting a hike this year, versus eight seeing no change from the current 3.5%-3.75% target range, and only one projecting a cut. That effectively shifts the median to a hike bias compared to a cut bias in March, in line with median inflation rising to 3.6% in June from 2.7% in March. There were only 18 dots in June, as Warsh withheld his forecast. The FOMC statement was also about half the length of those issued under former Fed chairman Jay Powell, central bank watchers noted.
At the time of writing, the ringgit was hovering between 4.12 and 4.14 against the greenback, around 4% weaker than 3.97 just three weeks ago. There might be some near-term weakness as markets decide whether there is enough data backing a US rate hike as early as mid-September. The FOMC, which kept its key policy rate unchanged for a fourth straight meeting last Wednesday (June 17), meets again at end-July.
Bank Negara Malaysia is widely expected to keep its overnight policy rate (OPR) unchanged at 2.75% for the rest of this year, even though economists are not ruling out rate hikes completely as they keep a close watch for signs of cost-push inflationary pressure. Bank Negara’s monetary policy committee (MPC) has three more meetings scheduled for this year: July 9, Sept 3 and Nov 5. The OPR has remained unchanged for five straight meetings since a surprise pre-emptive 25-basis-point (bp) rate cut to 2.75% in July 2025. The rate differential with the US federal funds target rate (FFTR) had narrowed from as high as 250bps, between July 2023 and August 2024, to 100bps currently.
Noting improving geopolitical conditions, some experts reckon that markets may have “overreacted” to Warsh’s hawkish remarks, deeming his non-tolerance on inflation as “standard central banking rhetoric”.
Market focus is likely to shift back to monetary policy differentials as geopolitical risks from the Middle East situation ease, experts at UOB Bank told clients in a June 19 note, ascribing a 55% probability to the US-Iran interim peace deal leading to a formal agreement.
A gradual reopening of the Strait of Hormuz and resumption of energy exports across the second half of 2026 (2H2026) should see Brent crude moderating to US$85/bbl in 3Q2026, US$80/bbl in 4Q2026 and US$70/bbl in 1H2027, say the UOB economists.
“However, there is also the risk that this interim deal fails to materialise into an eventual formal peace agreement. Under such a situation, the US and Iran risk reverting to an uneasy stalemate with occasional exchanges of hostilities,” add the UOB economists.
“Hence, energy supply disruption will continue and inventory drawdown will intensify with the Strait of Hormuz remaining highly uncertain and mostly blocked to shipping across 2H2026. The world will need to continue relying on alternative supply and contingency measures. This will result in the renewed grind in Brent crude oil price higher in the coming quarters as supply pressure and inventory drawdown start to bite anew, to US$90/bbl in 3Q2026, US$95 in 4Q2026 and US$100/bbl in 1H2027. We ascribe a 25% probability to this ‘compromise case’ outcome.”
They see an “insignificant” 15% chance of a “worst case” outcome of an indefinite blockade at the Strait of Hormuz pushing Brent crude towards US$120/bbl.
Putrajaya’s monthly fuel subsidy burden — which surged to RM5 billion in March and peaked at RM7.5 billion in April as Brent crude surged near US$120/bbl — has since eased to around RM3.5 billion to RM4 billion as crude oil prices moderated closer to US$80/bbl. This is still at least five times the RM700 million in February before the US-Iran war when the benchmark hovered below US$70/bbl. Still, Malaysia’s position as a net energy exporter has placed the country in a better position against most of its Asean peers amid the Middle East crisis. There was no runaway inflation. Malaysia’s Consumer Price Index for May came in at 2% year on year, inching higher from 1.9% in April, while core inflation was unchanged at 2%.
“Reopening is not equivalent to normalisation, however, as transit confidence will take time to rebuild. We expect futures markets to remove risk premia, while physical energy markets normalise with a lag,” say economists at CIMB Treasury and Markets Research led by head of research Michelle Chia. The research house expects oil prices to range between US$80/bbl and US$85/bbl, falling further only when inventory levels are rebuilt towards 3Q2027.
Its USD/MYR forecast is more bearish at 4.08 in 3Q2026 and 4.11 in 4Q2026, before strengthening to 4.07 in 1Q2027, 4.00 in 2Q2027 and 3.98 in 3Q2027. Data appended to its June 19 note pencils in one 25bp US FFTR hike to 4% (upper bound) in 4Q2026 compared to a hold previously.
“Post-ceasefire, central banks have the task of imputing the inflation impulse in 2H2026 into policy decisions. Hawkish new dot plots solidify the risk of an FFTR hike. While we expect US inflation to moderate through 2027, US growth has remained remarkably resilient and labour market conditions continue to support consumption despite the Hormuz shock,” the CIMB Treasury economists wrote in a June 19 note.
Conversely, economists at UOB Bank expect “an extended US Fed rate pause throughout the remainder of 2026, with easing expected to resume only in 2027”. They forecast two rate cuts to bring the FFTR upper bound to 3.25% by end-2027, but at the same time note the “rising risk of a rate hike” as inflation risks have risen in the US.
For now, experts at UOB still see the ringgit trading firmer against the US dollar at 4.00 in 3Q2026, 3.98 in 4Q2026, 3.94 in 1Q2027 and 3.92 in 2Q2027, appended data show.
Winson Phoon, head of fixed income research at Maybank Investment Banking Group in Singapore, who has been watching for potential policy shifts and foreign fund flow sentiment under the new Fed chair, says Malaysian government bonds have shown remarkable resilience compared with most of its emerging market peers in Asia and the G4 nations — Brazil, Germany, India and Japan — which are bidding for permanent seats on the United Nations Security Council.
While Malaysia Government Securities yields “have shifted higher across the curve” since the start of the Middle East conflict, led by the front-end or shorter-term paper, Phoon says the overall sentiment on ringgit bonds “has held up well, supported by expectations of stable domestic inflation and OPR likely to be held unchanged at 2.75% through 2026”.
“We don’t expect Malaysia to raise reliance on short-term debt,” says Phoon, noting that short-term debt only accounts for about 1% of outstanding government debt, a structure that “is likely to remain broadly unchanged going forward”. Malaysia “still maintains a conservative debt profile with well-spread-out maturities” that helps reduce refinancing risks, he adds.
That should bode well for the country as markets recalibrate in the coming months.
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