Malaysia’s ‘goldilocks’ macroeconomic conditions will enable Bank Negara Malaysia (BNM) to maintain its overnight policy rate (OPR) at our forecasted rate of 3.00% for the remainder of 2024. However, our baseline view for an unchanged OPR in 2025 faces greater uncertainty. BNM’s current monetary policy stance remains supportive of the economy. Advance real GDP growth registered a robust 5.3% YoY in 3Q24 and 5.1% YoY in the first three quarters of 2024, rebounding nicely from 3.8% YoY in the first three quarters of 2023. Headline inflation remained contained at end-3Q24, likely averaging 1.9% YoY in the first three quarters of 2024, close to its 10-year average of 2.0%, despite the diesel subsidy rationalisation in June. The Malaysian ringgit remains the top-performing regional currency year-to-date, strengthening by 6.8% against the US dollar despite a pullback in October. Favourable factors include the US Fed’s easing cycle, BNM and the government’s joint efforts to support foreign inflows, and improved investor confidence in Malaysia’s growth prospects and structural reforms.
Budget 2025 announced on October 18 maintained a focus on fiscal consolidation and economic growth, but with higher inflation. The budget targets a lower fiscal deficit to GDP ratio of 3.8% in 2025 from 4.3% in 2024, alongside resilient real GDP growth of 4.5%-5.5% in 2025. However, the government expects higher inflation of 2.0%-3.5% in 2025, likely reflecting the upside impact of fiscal measures such as the broadening of the Sales & Service Tax and further subsidy rationalisation. The much-anticipated targeted RON95 fuel subsidies will be implemented in mid-2025. The government is removing RON95 subsidies for the top-15% income earners, and is considering a two-tier price system. BNM will remain vigilant regarding upside inflation risks in 2025, complicated by domestic policy changes. If second-round price effects on inflation emerge, the central bank could raise its OPR, bucking the global easing trend.
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