Malaysia’s 2026 Inflation Forecast Remains at 1.8% to 2% as Price Pressures Stay Manageable

KUALA LUMPUR, JULY 2026 – Malaysia’s inflation is expected to remain manageable throughout 2026, with economists maintaining their full-year forecasts at between 1.8% and 2%. Targeted fuel subsidies, stable domestic demand and contained external price pressures are expected to help prevent a sharp increase in consumer prices.

Bank Negara Malaysia is also widely expected to keep the Overnight Policy Rate unchanged at 2.75% for the remainder of the year. Economists believe the current policy setting remains appropriate as Malaysia continues to record resilient economic conditions, a stable labour market and healthy loan growth.

AmBank Group chief economist Firdaos Rosli maintained the bank’s 2026 inflation projection at 2%. However, he expects price pressures to strengthen during the second half of the year before potentially peaking in the fourth quarter.

Malaysia’s Consumer Price Index rose by 1.9% in June, slightly below AmBank’s projection of 2%. The reading reinforced expectations that inflation remains supported by firm domestic demand and the targeted fuel subsidy programme under Budi Madani, although household consumption is currently not strong enough to trigger significant demand-driven inflation.

The softer inflation reading in June was mainly attributed to slower price increases in transportation, education, personal care, social protection, miscellaneous goods and services. Inflation for food and beverages, which represents the largest component of Malaysia’s consumer price basket, remained unchanged at 1.4%.

Transport inflation moderated to 2.8% in June from 3.8% in May, partly reflecting lower fuel-related price pressures. Economists said targeted subsidies and government price-control measures have helped shield Malaysian consumers from the full impact of higher international fuel costs.

Inflation could accelerate later in 2026 because of a lower comparison base from the corresponding period last year. Businesses may also gradually pass higher raw-material and transportation costs to consumers, particularly after the producer price index began increasing from March.

Weather conditions remain another potential source of price pressure. Possible disruptions linked to El Niño could reduce agricultural production and affect food supplies, potentially raising the prices of essential goods during the second half of the year.

Prolonged conflict in West Asia is also being closely monitored because it could disrupt energy supplies, transportation routes and international trade. Although targeted fuel subsidies may limit the direct impact on households, businesses could face higher operating and logistics costs.

Bank Muamalat Malaysia Bhd maintained its 2026 inflation forecast at 1.8%. Its chief economist, Dr Mohd Afzanizam Abdul Rashid, said targeted subsidies and price-control policies should continue protecting consumers from external price increases, particularly those caused by higher global fuel prices.

The planned expansion of the MyKad-based targeted subsidy distribution mechanism to diesel is also expected to help contain inflation. The system is intended to direct government assistance more accurately to eligible consumers while reducing the broader fiscal burden associated with blanket subsidies.

From a monetary policy perspective, Mohd Afzanizam said the current interest-rate level remains sufficiently restrictive. Malaysia’s real interest rate, calculated by subtracting inflation from the policy rate, stood at approximately 0.85%, above its long-term average of 0.7%.

Economists therefore do not expect Bank Negara Malaysia to make another policy-rate adjustment this year. The 25-basis-point reduction introduced in July 2025 is viewed as having already provided the necessary support to the economy.

The government’s work-from-home initiative may help reduce fuel consumption among participating workers, but economists believe it is unlikely to significantly change the country’s inflation trajectory. The measure is considered more relevant to managing fuel usage than directly controlling consumer prices.