Malaysia set to hold interest rate as growth stays strong, inflation low

MALAYSIA is set to keep its benchmark interest rate unchanged on Thursday, as better-than-expected economic growth coupled with low inflation provide a buffer for policymakers to stand pat.

Bank Negara Malaysia is expected to keep the Overnight Policy Rate at 2.75 per cent at its first monetary policy committee meeting for the year, according to all 22 economists in a Bloomberg survey. The central bank has adjusted borrowing costs just once in the past two years, with a 25-basis point cut in July 2025.

BNM has reason to remain steady. The South-east Asian nation has proved resilient amid global headwinds, with economic growth accelerating in the second half of the year on robust domestic demand.

Fears that US President Donald Trump’s tariffs would prompt an export slowdown in late 2025 didn’t materialise, with the value of outbound shipments last year reaching a record high. At the same time, inflation remained benign, easing to a five-year-low of 1.4 per cent in 2025.

The country’s fortunes contrast with the travails of neighbouring Indonesia, which held rates unchanged on Wednesday after weak investor sentiment sent the rupiah to a record low.

Here’s what to watch on Thursday at 3 pm local time:

External risks

Malaysia is bracing for softer growth this year on expectations that global volatility will weigh on the trade-reliant nation.

Renewed tariff threats from the US on various countries and growing geopolitical risks may lead to a bumpy ride for Malaysia’s trade this year, United Overseas Bank economists Julia Goh and Loke Siew Ting wrote in a note on Tuesday.

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Malaysia expects trade to increase at a slower pace of 3.3 per cent this year, from 6.3 per cent in 2025, amid the fading impact of tariff-related front-loading and the possibility of fresh levies. A firmer ringgit could also put downward pressure on export-oriented industries. The ringgit emerged as the strongest currency in Asia last year.

Growth drivers

Policymakers are counting on domestic demand to shield the economy from external headwinds, with private consumption set to be buoyed by the lowest jobless rate in more than a decade as well as plans to welcome a record number of tourists this year.

Investment momentum should also remain intact in Malaysia, supported by ongoing infrastructure projects and continued data center expansion amid the global tech upcycle, To Zheng Hong, an analyst at Apex Securities, wrote in a note on Wednesday.

The government expects the economy to expand 4-4.5 per cent in 2026, slower than the 4.9 per cent growth seen last year.

Stable inflation

State efforts to address higher living costs through price controls and petrol subsidies are having an impact. Malaysia’s inflation stayed moderate last year, averaging below the central bank’s 1.5 to 2.3 per cent forecast.

For 2026, inflation is expected to remain below its long-term historical average, reinforcing the view of a relatively benign price environment, Farid Burhanuddin, an analyst at TA Securities Holdings, said in a note on Wednesday.

Demand-driven inflation is expected to be the main contributor this year, underpinned by government cash handouts, a firm labour market and rising household incomes - all of which will likely be manageable and transitory, he said. BLOOMBERG