The Overnight Policy Rate (OPR) could see an upward revision next year as the government moves forward with its RON95 petrol subsidy rationalisation plan, which may trigger a new round of inflationary pressure.
At the moment, inflation remains comfortably low, consistently below 2.0 percent throughout the year.
This extended period of low inflation highlights the success of prior monetary measures and the stability of external market prices.
However, 2025 could change the game: the government's targeted subsidy plan for RON95, set for mid-year, may well ignite inflationary pressures, prompting a reevaluation of monetary policy.
In contemplating Bank Negara Malaysia's (BNM) potential move to hike the OPR, we're reminded that the economy is a complex ecosystem, one in which no single lever works in isolation. Raising rates to combat inflation isn't as straightforward as it sounds, particularly for a small, open economy like Malaysia, which lives and breathes on the crosswinds of global markets.
BNM's decision to raise rates would impact more than just inflation; it would ripple through everything from household budgets to currency markets.
And inflation itself isn't a one-size-fits-all issue.
Is it demand-driven, where people are simply spending more and driving up prices?
Or is it supply-driven, rooted in rising production costs and external pressures?
This isn't trivial – the way you answer that question determines if a rate hike will be effective or if it'll just be another pebble in the river.
Take Malaysia's planned rationalization of RON95 petrol subsidies, for instance.
By removing subsidies, the government could create an inflationary jolt, as the price of fuel – a lifeline of modern economies – would rise.
When fuel prices go up, transportation and production costs rise too, filtering down to higher prices on everything from groceries to school supplies.
A conventional rate hike won't do much to address that type of inflation; it could even make things worse by squeezing households, many of which are already carrying heavy debt loads.
And if you think of inflation as simply too much money chasing too few goods, the idea of controlling it solely by raising rates falls short when it's supply chains, not spending, that are the problem.
In the age of globalisation, Malaysia can't afford to ignore the role of the exchange rate, either.
A higher OPR might strengthen the ringgit, theoretically reducing the cost of imports and taming some inflationary pressures from abroad.
But here's the catch: Malaysia is a major exporter, so a stronger currency could reduce competitiveness, pulling demand for Malaysian goods in the opposite direction.
BNM, like every central bank in a globalized economy, must play chess on a global board.
It's not just a matter of looking at domestic inflation and output gaps but also watching currency movements, trade flows, and the pulse of global demand.
And let's not forget the unique interaction of policies slated to take effect in Malaysia.
Imagine stacking a subsidy cut on top of a minimum wage hike, followed by a rate increase.
The result?
Likely a spiral of inflationary pressures from multiple fronts.
Workers will earn more, which could stoke spending and drive prices up, while fuel costs climb and the higher cost of borrowing chips away at disposable income.
This "double jeopardy" of policy-induced inflation risks unintended
consequences that reverberate through the economy.
In short, controlling inflation can't be a game of policy whack-a-mole, where every uptick in prices triggers an OPR hike.
It's a delicate balancing act that requires data-driven precision, a global view, and a deep understanding of inflation's many faces.
Yes, raising rates is a tool, but like any tool, its effectiveness depends on how well it's used – and in Malaysia's case, the challenge is to use it in harmony with other policy instruments, without compromising the financial resilience of households or the country's standing on the world stage.
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Economist Samirul Ariff Othman is an adjunct lecturer at Universiti Teknologi
Petronas, international relations analyst and a senior consultant with Global Asia Consulting.