Malaysia’s 2026 Inflation Forecast Maintained at 1.8%–2.0%

KUALA LUMPUR, JULY 2026 – Malaysia’s inflation rate is expected to remain under control in 2026, with economists maintaining their forecasts at between 1.8% and 2.0%.

The outlook is supported by the implementation of targeted fuel subsidies, steady domestic demand and relatively contained external price pressures. Bank Negara Malaysia is also expected to keep the Overnight Policy Rate, or OPR, unchanged at 2.75% for the rest of the year.

AmBank Group chief economist Firdaos Rosli maintained the bank’s full-year inflation forecast at 2.0%. However, he expects price pressures to strengthen during the second half of 2026 and potentially reach their highest level in the fourth quarter.

Malaysia’s Consumer Price Index increased by 1.9% in June, slightly below AmBank’s forecast of 2.0%. Firdaos said inflation continued to be supported by resilient domestic demand and the implementation of targeted fuel subsidies under the BUDI MADANI programme.

Despite stable consumer spending, current consumption levels are not considered strong enough to generate significant demand-driven inflation.

June’s softer inflation reading was mainly attributed to slower price increases in transportation, personal care, social protection, miscellaneous goods and services, and education. Inflation in the food and beverage category, which carries the largest weighting in the Consumer Price Index basket, remained unchanged at 1.4%.

Inflation could rise moderately in the second half of the year due to a lower comparison base from the corresponding period in 2025. Delayed effects from higher raw material prices and transportation costs could also gradually be passed on to consumers.

Weather disruptions associated with El Niño may create additional upward pressure on food prices. Prolonged conflict in the Middle East also remains a major external risk because it could disrupt supply chains and increase global energy costs.

However, targeted fuel subsidy mechanisms are expected to limit the direct impact of higher international fuel prices on Malaysian consumers. Businesses may experience stronger cost pressure than households, particularly following increases in the Producer Price Index since March 2026.

Firdaos expects Bank Negara Malaysia to maintain the OPR at 2.75%, supported by resilient domestic economic conditions, stronger growth prospects, a stable labour market and healthy loan expansion.

Bank Muamalat Malaysia Bhd also maintained its 2026 inflation forecast at 1.8%. Its chief economist, Dr Mohd Afzanizam Abdul Rashid, said targeted subsidies and price-control policies would continue to protect consumers from external price pressures, particularly rising global fuel costs.

The continued expansion of targeted subsidy distribution through MyKad, including assistance involving diesel, is expected to help contain inflation. Lower fuel prices also contributed to June’s softer inflation rate, with the transportation sub-index easing to 2.8% from 3.8% in May.

From a monetary policy perspective, the current interest rate remains sufficiently restrictive. The real interest rate, calculated by subtracting inflation from the OPR, stood at 0.85%, above its long-term average of 0.70%.

Bank Muamalat therefore expects Bank Negara Malaysia to leave the OPR unchanged at 2.75% throughout the remainder of 2026, as the current rate is considered appropriate for supporting the economy while keeping inflation manageable.

Economists also assessed the government’s work-from-home initiative for civil servants. Although the programme may reduce commuting time, transportation expenses and fuel consumption, it is not expected to significantly alter Malaysia’s overall inflation trajectory.

The initiative, implemented since mid-April, reportedly saved the government RM7.31 million in petrol subsidies and reduced fuel consumption by 4.05 million litres within three months. Around 659,000 civil servants benefited from the programme.