Malaysia's monetary policy is expected to gain greater flexibility in 2026, following the Fiscal Responsibility Act, which lowers the budget deficit cap to 3.0 per cent from 3.5 per cent in 2025.
IPPFA Sdn Bhd director of investment strategy and country economist Mohd Sedek Jantan said the move effectively removes fiscal dominance from the policy mix, ensuring that government spending and deficits remain rule-bound and non-inflationary.
"This means Bank Negara Malaysia no longer needs to maintain a defensive interest-rate premium to protect the ringgit or anchor inflation expectations.
"It allows the overnight policy rate (OPR) to be set against output gaps, core inflation and financial-cycle risks," he told Business Times.
He added that the policy stance enables a neutral-to-accommodative approach that can support domestic demand and investment while maintaining macroeconomic stability.
Sharing similar view, OCBC senior Asean economist Lavanya Venkateswaran said Malaysia's central bank is expected to maintain a flexible approach to monetary policy in 2026, with room for a potential rate cut.
"We are comfortable with our forecast for another 25 basis points rate cut from Bank Negara Malaysia next year, likely in the second quarter," Lavanya said in a note.
She added that softer economic growth and limited scope for broad-based fiscal support suggest that monetary policy still has wiggle room, particularly as inflationary pressures remain well managed.
Lavanya also highlighted that the government's subsidy rationalisation efforts have been effectively executed.
She said while prices of targeted items rose in 2025, overall headline and core inflation stayed contained.
She also noted that the risk to the projected rate cut is stronger-than-expected gross domestic product growth, which could lead Bank Negara to keep rates on hold for a prolonged period in 2026.
Source: NST