KUALA LUMPUR: Malaysia’s inflation rate is projected to reach 2.9% in 2025, fuelled by domestic subsidy cuts and global economic volatility.
Allianz SE chief economist Ludovic Subran said the removal of subsidies to address fiscal imbalances has contributed to rising costs for Malaysian households, adding pressure to an already delicate economic situation.
He said the gradual reduction in government subsidies, particularly in energy and essential goods, is a key driver of the inflation forecast.
“With household spending power reduced, many are saving more, contributing to a slowdown in consumption. The combination of tighter fiscal policies and reduced purchasing power has created an uncertain economic environment.
“According to recent projections, the Malaysian central bank’s decision to maintain its current interest rate policy is playing a role in moderating inflation, but not enough to offset the effects of rising prices,” Subran said during a press conference entitled Autumn Economic Outlook 2024-2026: The Great Balancing Act today.
On external pressures, he noted that global economic forces also contribute to Malaysia’s inflation outlook.
“The slowdown in China’s economy, a major trading partner for Malaysia, is one of the factors in the inflationary outlook. Weaker demand from China could reduce export revenues, adding strain to Malaysia’s external balances and potentially leading to further price increases domestically.”
Subran said the ongoing subsidy reform is part of a broader strategy to improve Malaysia’s fiscal health, but the timing and approach have been met with some concern.
“While the removal of subsidies is aimed at reducing the fiscal deficit, it has led to a noticeable increase in the cost of living. The 2.9% inflation rate is still manageable and could worsen if domestic demand does not recover or global economic conditions deteriorate.
“Reducing subsidies can help correct fiscal imbalances, but it has a short-term cost to consumers, particularly in Malaysia, where imported goods make up a significant portion of consumption. The challenge is striking a balance between reducing the fiscal deficit and managing inflationary pressures that hurt households,” he noted.
As Malaysia heads towards 2025, Subran said, the government will likely face increased pressure to cushion the impact of inflation on its citizens while navigating a complex global economic landscape.
He suggested that targeted subsidies or fiscal incentives could help alleviate the burden on lower-income households without reversing progress on fiscal reform.
“With inflation predicted to rise to 2.9%, Malaysia will need to implement a careful mix of domestic policy and global economic diplomacy to manage price stability and maintain growth amid these challenging conditions,” Subran said.
