Malaysia Kept Inflation Down, Now It Faces A RM40 Billion Bill And Rising Interest Rates
Fuel subsidies shielded households from the worst of a 76.8% oil price surge, but the cost landed on government finances. With Bank Negara expected to raise rates to 3.00% by the end of 2027, the full cost of that cushion is only beginning to show.
Malaysia's inflation stayed contained despite surging oil prices, thanks to fuel subsidies and price controls, costing the government an estimated RM40 billion.
As a net commodity exporter, Malaysia's current account remains in surplus, giving it an advantage over regional peers facing deficits.
Global oil prices have surged again this year, but Malaysia’s inflation numbers barely moved.
That’s according to OCBC Group Research’s latest report, which tracked Brent crude averaging USD87.87 a barrel between 2 January and 14 September – a 76.8% jump from a year earlier.
Malaysia’s core inflation stayed flat at 2.0% for both 2025 and the year-to-date in 2026.
Headline inflation edged up from 1.4% to 1.8% over the same period.
OCBC forecasts headline inflation to land at 2.0% for 2026 and 2.1% for 2027.
Subsidies Absorbed The Shock
The report attributed the containment to the Madani government’s policy decisions.
Fuel subsidies, price controls, and other measures cushioned households from the full impact of pricier oil. But that cushioning came at a cost to government finances instead.
Malaysia cut its BUDI95 petrol quota from 300 to 200 litres a month on 1 April, during the oil price shock. It was later restored to 300 litres, and the Budi Madani diesel quota was raised from 300 to 400 litres a month, effective 1 September.
The changes benefited an estimated 16 million recipients as part of Merdeka-eve relief measures.
Authorities estimate the total subsidy bill, including other forms of assistance, at RM40 billion – about 1.8% of GDP.
Malaysia’s Trade Position Still Favourable
Unlike net oil importers such as Thailand, the Philippines, Vietnam and India, Malaysia is a net commodity exporter of items like palm oil, rubber, crude petroleum and LNG.
OCBC noted Malaysia’s commodity export growth has been picking up, helping offset some of the pressure from costlier oil imports.
The country’s current account balance stood at 1.6% of GDP in 2025 and rose to 2.5% in the first half of 2026. OCBC forecasts it easing to 1.4% for 2026 before rising again to 1.6% in 2027 – still a surplus, unlike several regional peers now running deficits.
OCBC maintained its view that Bank Negara Malaysia will raise its Overnight Policy Rate by 25 basis points over 2026 and 2027, from the current 2.75% to 3.00% by end-2027.
The report attributed this to a broader regional pattern: central banks across ASEAN-5 and India tightening policy to guard against price, external and fiscal pressures building from elevated oil prices.
