MALAYSIA’S interest rates are likely to remain steady for the rest of 2026, although stronger economic growth and the risk of rising inflation could bring forward the next increase in borrowing costs.
Bank Negara Malaysia (BNM) is expected to weigh the need to support domestic demand against the risk that leaving rates too low for too long could encourage excessive borrowing and financial imbalances.
Recent discussions conducted by Nomura Research with regional central banks suggest Malaysia is moving closer to a gradual normalisation of monetary policy, even as research houses remain divided over whether the central bank will act as early as November or wait until next year.
Nomura Research maintains its expectations that BNM will raise the overnight policy rate (OPR) by 25 basis points (bps), from 2.75% to 3%, at its Nov 5 Monetary Policy Committee (MPC) meeting.
Most other research houses, however, expect the central bank to hold rates steady before making a modest adjustment next year.
The differing forecasts reflect a key question for policymakers: whether Malaysia’s stronger growth outlook and emerging cost pressures justify removing some of the monetary accommodation introduced amid external uncertainties last year.
Following recent discussions with senior regional central bank officials, Nomura views BNM as relatively hawkish compared with its regional peers, although the central bank appears to be signalling patience rather than an urgent need to tighten policy.
“BNM seems to suggest some accommodation in its stance is in place, originally intended as ‘insurance’ against external uncertainty from last year, but stronger-than-expected growth has reduced the justification for maintaining that cushion indefinitely,” the research house says.
“We gathered that the removal of ‘appropriate’ from the latest policy statement was deliberate, and that the degree of accommodation could increase given that growth is above potential,” it adds.
Nevertheless, manageable inflation means the central bank has limited urgency to act, although signs of growing financial imbalances could prompt a more pre-emptive adjustment, Nomura highlights.
BNM’s upbeat assessment of the economy is underpinned by strong electronics exports, semiconductor-related investments and a broad-based investment upcycle. Nomura believes these factors could keep growth above potential into 2027, pushing the economy towards a modest positive output gap.
The expansion also includes advanced packaging facilities and data centre investments, although BNM is monitoring the possibility of a correction in global artificial intelligence capital expenditure.
For now, the central bank appears to see limited wage pressures from these growth drivers. It is also watching whether higher labour costs eventually translate into broader price increases.
Patient approach
September’s inflation figures provide some support for a patient approach. Headline consumer price inflation eased to 1.8% year-on-year from 1.9% in August, while core inflation moderated to 1.7% from 1.8%.
However, the softer annual readings do not entirely remove the risk of price pressures building up. Both headline and core inflation momentum edged higher on a three-month moving average basis, driven by firmer food prices and utility costs.
The government’s targeted fuel subsidies and regulated utility tariffs have helped contain the pass-through from higher global energy prices.
However, persistently elevated energy costs stemming from the Middle East conflict remain a risk to the domestic inflation outlook.
The recently tabled Budget 2027 adds another consideration. Higher minimum wages, increased cash transfers, tax reductions and relief initiatives are expected to support household spending, potentially keeping domestic demand resilient into next year.
BNM reportedly expressed little concern about the substantial increase in minimum wages, viewing wage reform as necessary for more sustainable household income growth. Still, it intends to monitor whether higher labour costs feed into broader price increases.
Differing views
UOB Global Research sees these developments strengthening the case for monetary normalisation, with a possible rate increase as early as the November meeting.
It noted that stronger-than-expected third-quarter (3Q26) advance gross domestic product (GDP) growth, together with expansionary Budget 2027 measures, points to resilient domestic demand heading into 2027.
“This reinforces the case for a gradual policy normalisation by BNM, which we expect could be initiated as early as Nov 5,” UOB Global Research argues.
Its conviction is further supported by governor Datuk Seri Abdul Rasheed Abdul Ghaffour’s recent remarks, indicating “greater flexibility to adjust interest rates following the shift in forward guidance in September, alongside the central bank’s readiness to respond should inflationary pressures intensify amid persistently elevated energy prices stemming from the Middle East conflict”.
Malaysia’s GDP grew 5.3% in 3Q26, moderating from 6% in 2Q26 but remaining resilient.
Public Investment Bank (PIVB) Research is more cautious, maintaining its forecast for the OPR to stay at 2.75% through end-2026 before a conditional increase to 3% in 2027.
“A November hike remains an upside risk, although we would need clearer evidence of broadening services inflation, stronger wage pressures or a shift in BNM’s policy guidance before bringing forward our call,” PIVB Research argues.
“Conversely, prolonged weakness in underlying inflation or sustained tightening in credit conditions could keep the OPR at 2.75% throughout 2027,” it adds.
Kenanga Research expects BNM to hold the OPR at 2.75% on Nov 5 before delivering a 25-bps increase to 3% in the 1Q27, followed by an extended pause.
“The governor’s comment that BNM has ‘space to act’ if price pressures rise supports our call,” it says. It views the move as a return to normal policy settings rather than the beginning of a sustained tightening cycle.
RHB Research also expects the OPR to remain unchanged in November, followed by a token 25-bps increase in the first half of 2027.
The brokerage sees the move as bringing policy closer to a neutral setting, giving BNM greater room to respond to future economic shocks, rather than addressing significant inflationary pressures.
Apex Securities similarly expects the central bank to hold rates in November before raising them by 25 bps in 2027, citing steady inflation and positive domestic growth prospects.
TA Research also favours an unchanged OPR in November, saying the latest inflation reading reduces the urgency for an increase.
Although resilient growth gives BNM flexibility to adjust policy, it does not by itself establish a need for tighter monetary conditions.
“Higher US interest rates and a firmer US dollar remain relevant through their implications for capital flows, the ringgit and imported costs.
“However, a US Federal Reserve rate increase or currency depreciation would not automatically require BNM to follow suit,” the brokerage says.
“A domestic policy response would depend on whether these developments generate sustained inflationary pressures or materially alter financial conditions. The possibility of an OPR hike therefore remains, but its near-term likelihood has diminished following September’s softer inflation outcome,” it adds.
BIMB Research expects the OPR to remain at 2.75% throughout both 2026 and 2027, arguing that fuel subsidies and regulated utility tariffs should help Malaysia absorb near-term external shocks.
It also expects further moderation in selected administered prices and services-related components in the 4Q26.
The debate over the timing of normalisation is also tied to financial stability.
Nomura Research says BNM acknowledges that keeping the OPR at 2.75% for too long could encourage excessive risk-taking and financial imbalances, although it sees limited evidence of such behaviour at present.
As such, the central bank is expected to monitor underwriting standards, household leverage, risk pricing and exposures to non-bank financial institutions when assessing whether monetary conditions remain appropriate.