Bank Negara to hold rate as Mideast war sets off fresh uncertainty

2026-03-05 - 00:54

Bank Negara Malaysia has adjusted borrowing costs just once in the past two years, with a quarter-point cut in July 2025. KUALA LUMPUR: The central bank will likely stand pat on borrowing costs, exercising caution as the Iran war unleashes a fresh wave of uncertainty on the global economy. Bank Negara Malaysia (BNM) is expected to hold its overnight policy rate steady at 2.75% on Thursday, according to all 24 economists surveyed by Bloomberg. It has adjusted borrowing costs just once in the past two years, with a quarter-point cut in July 2025. The cautious stance comes even as Malaysia has proven among the region’s most resilient economies in the past year. Economic growth beat official estimates in 2025 on the back of robust consumer demand, exports and manufacturing that’s defied the impact of US tariff hikes. However, escalating violence in the Middle East this week has driven up commodity prices, disrupted supply chains and sparked volatility in financial markets, complicating the outlook for Asia’s central banks. BNM has room to stay on hold this meeting and throughout 2026 given faster-than-expected economic momentum and modest inflation, said Afzanizam Abdul Rashid, chief economist at Bank Muamalat Malaysia Bhd. Prior to the Iran conflict, BNM would have even likely started to embed lines in the Thursday decision to signal that there is no need for further monetary policy accommodation, he said. “But now, I would think they would need to stay neutral,” Afzanizam added. “They would like to convince the business community and citizens that they stand ready to react depending on the economic conditions going forward.” Here’s what to watch for in the statement due to be released at 3pm: Inflation expectations Investors will be closely watching BNM’s assessment of the economic impact of the Middle East crisis. According to an Oversea-Chinese Banking Corp report, a 10% increase in global oil prices will likely push up annual headline inflation by 0.4 to 0.6 percentage point in Malaysia, a net petroleum importer. While the government offers subsidies, reforms in September 2025 limited their scope for the country’s most popular fuel. That change “suggests that inflationary pressures will likely pick up more perceptibly compared to previous episodes of oil price shocks”, OCBC economists Selena Ling and Lavanya Venkateswaran wrote in a note Monday. Growth path Trade uncertainty could also weigh on growth prospects. After the Supreme Court struck down his earlier tariffs, US president Donald Trump set a fresh global levy of at least 10%, with the administration seeking “continuity” with nations that have trade agreements. It is unclear what will become of Malaysia’s earlier pact with Washington that initially set the rate at 19% in exchange for concessions from the Southeast Asian nation. “It will be interesting to see whether BNM will tweak its tone, even if subtly, on Malaysia’s growth amid tariff fluidity,” said HSBC Holdings Plc economists Yun Liu and Madhurima Nag. As long as Malaysia’s tariff rate is relatively on par with regional peers, the country should retain its edge as an alternative manufacturing destination to China, they said. However, the threat of US tariffs on semiconductors could hit Malaysia hard, since tech exports have been a major growth driver. Currency view Despite the risks, the market is betting that after an extended pause, BNM’s next rate move will likely be a pivot towards monetary tightening. Ringgit swaps are pricing an over 20% probability of a quarter-point rate hike over the 12-month horizon. The ringgit has risen about 3% against the dollar this year, outperforming all peers in Asia even in the wake of the volatility triggered by the war in Iran, and is up 13% in the past 12 months. “Despite periodic concerns on the impact on Malaysia’s exports, BNM seems comfortable with the ringgit and has not voiced any concerns,” HSBC said.