Malaysia: Policy Rate Expected to Remain Unchanged – DBS Bank

A report from DBS Bank Research, led by Chief Economist Taimur Baig, projects that Bank Negara Malaysia will hold the overnight policy rate at 2.75% at its final monetary policy meeting in 2026. This assessment is based on currently contained inflation, robust economic growth, and fuel subsidy policies that curb cost pass-through effects.

**Stable Inflation and Growth Support a Hold**

The report notes that Malaysia's headline inflation remains within the official comfort range of 1.5% to 2.5%, while both GDP and export performance maintain strong momentum. This "Goldilocks" economic environment provides the central bank with a window period where there is no urgency to adjust monetary policy. DBS Bank believes that the existing fuel subsidy mechanism effectively limits the transmission of upstream prices to end-consumer prices, further solidifying the foundation for price stability.

**Policy Normalization Timing May Be Delayed to H1 Next Year**

Given the aforementioned macroeconomic conditions, DBS Bank analysts judge that Malaysia's monetary policy normalization process can be postponed to the first half of 2027. This implies that the current rate level of 2.75% is expected to persist throughout 2026. This expectation aligns with the general market view; according to recent reports, Bank Negara Malaysia has held rates steady across multiple meetings since cutting rates by 25 basis points in July 2025, and economists widely expect it to continue holding.

**External Environment and Internal Resilience Form the Decision-Making Backdrop**

Despite export boosts from the global tech cycle, Bank Negara Malaysia has maintained a cautious stance on global growth prospects in its previous statements. DBS Bank's view, however, places greater emphasis on the resilience of the domestic economy, highlighting that with a combination of strong domestic demand and controlled inflation, there is no immediate need for the central bank to tighten or loosen monetary policy. This stance implies that, barring a major external shock or an unexpected surge in inflation, the current interest rate steady state will persist.