Malaysia’s headline inflation rose in Q1 2026, as core price pressures eased

Headline inflation increased to 1.6% in the quarter, even as core inflation moderated to 2.1%, while the economy grew 5.4% on resilient domestic demand and strong electrical and electronics exports.

Malaysia’s headline inflation rose in the first quarter of 2026, reflecting early signs of cost pass-through from higher global price pressures, even as underlying inflation continued to ease, according to Bank Negara Malaysia (BNM).

Headline inflation increased to 1.6% from 1.3% in the Q4 2025. BNM said the rise partly reflected higher global cost pressures linked to the conflict in the Middle East. Electricity charges and fuel prices, mainly RON97 and diesel, also increased during the quarter, leading to smaller declines in electricity inflation at -6%, compared with -10.3% in the previous quarter, and fuel inflation at -1.5%, compared with -1.9%.

Domestic demand continues to do the heavy lifting

Domestic demand remained the main support. Household spending was helped by positive labour market conditions and targeted policy measures, while investment continued to benefit from public and private multi-year projects, national master plans and the realisation of approved investments.

Exports also remained firm, led by electrical and electronics products. Manufacturing continued to benefit from demand for components linked to artificial intelligence and data centres, helping offset softer conditions in other parts of the economy.

Core inflation, however, moderated to 2.1% from 2.3%, mainly due to softer inflation in food away from home and rental costs. Food away from home inflation eased to 2.4% from 2.8%, while rental inflation slowed to 1.6% from 1.9%.

Inflation pervasiveness also continued to decline. The share of consumer price index items registering monthly price increases fell to 38.3% during the quarter, from 39.6% in the fourth quarter of 2025, and remained well below the historical first-quarter average of 52.2%.

The Malaysian economy recorded a firm growth of 5.4% in the first quarter of 2026

Malaysia’s economy expanded by 5.4% in the first quarter of 2026, moderating from 6.2% in the fourth quarter of 2025, but remaining supported by domestic demand.

Household spending was sustained by positive labour market conditions, with unemployment remaining low, alongside targeted policy measures. Investment growth was supported by the continued implementation of multi-year projects by both the private and public sectors, the high realisation rate of approved investments and the ongoing rollout of national master plans.

Exports also remained strong, driven mainly by continued expansion in electrical and electronics exports. Gross import growth, however, moderated amid slower growth in imports of capital, intermediate and consumer goods.

On the supply side, services growth moderated, reflecting slower motor vehicle sales after purchases were brought forward in the fourth quarter ahead of the expiry of import duty waivers for electric vehicles. Manufacturing remained supported by stronger electrical and electronics (E&E) exports performance, in line with continued demand for artificial intelligence and data centre-related components.

Agriculture growth eased as palm oil production normalised following previously high output and ongoing replanting activities. Mining and quarrying contracted due mainly to weaker oil and gas production. Construction growth also normalised from double-digit levels amid moderation in residential construction and civil engineering activity.

On a quarter-on-quarter, seasonally adjusted basis, the economy contracted marginally by 0.01%, compared with growth of 1.4% in the fourth quarter of 2025, reflecting the previous quarter’s very strong performance.

The ringgit appreciated against currencies of most trading partners in the first quarter of 2026

The ringgit strengthened against the currencies of most of Malaysia’s major trading partners in the first quarter of 2026, with the nominal effective exchange rate appreciating by 1.4%.

The ringgit also appreciated by 0.5% against the US dollar during the quarter, despite the dollar strengthening after the onset of the Middle East conflict amid risk-off sentiment.

The currency’s appreciation was supported by Malaysia’s firm domestic fundamentals and growth momentum, as well as continued non-resident inflows into domestic markets. Despite some volatility following the Middle East conflict and reduced expectations for US Federal Reserve policy rate cuts, the ringgit remained stronger on a year-to-date basis. As of 13 May 2026, it had appreciated by 3.3% against the US dollar and by 2.9% on a nominal effective exchange rate basis.

Looking ahead, BNM stated that external factors would continue to influence exchange rate movements, but Malaysia’s firm economic prospects and reform momentum were expected to provide support to the ringgit. The central bank said it would continue to monitor global developments and ensure the orderly functioning of the domestic foreign exchange market.

Credit growth increased driven by expansion in business loans

Credit growth to the private non-financial sector increased to 5.6% in the first quarter of 2026, from 5.3% in the fourth quarter of 2025, as the financial sector continued to support the economy’s financing needs.

The increase followed higher growth in outstanding loans, which rose by 5.6%, compared with 4.9% previously, particularly among businesses. Business loans expanded by 5.8%, from 3.9% in the previous quarter, mainly due to higher loan growth among non-SMEs. SME loan growth was broadly sustained at 6%, compared with 5.9% previously.

Household loan growth remained stable at 5.4%, compared with 5.5% in the fourth quarter of 2025, with steady growth across most purposes. Growth in outstanding corporate bonds moderated to 5.8%, from 6.9%, amid lower issuances during the quarter.

• Financial institutions offer various programmes which provide repayment flexibility, restructuring of financing facilities, and advisory services to help customers manage cash flow challenges.
• Borrowers may also avail themselves to assistance through the Debt Management Programme and Small Debt Resolution Scheme offered by Agensi Kaunseling dan Pengurusan Kredit (AKPK).
• The SME Stabilisation Relief Facility, a RM5bn relief financing facility, is now open for applications from micro, small and medium enterprises affected by the Middle East conflict. The facility is intended to provide working capital support to otherwise viable SMEs facing temporary disruptions to operations and cash flow. Applications can be made through participating financial institutions.

Beyond immediate relief, BNM is working with Credit Guarantee Corporation Malaysia to introduce a RM10bn guarantee scheme. The BNM-CGC Guarantee Scheme will comprise six portfolio guarantee schemes covering financial inclusion, climate and sustainability, productivity and resilience, and will be available to SMEs from 1 June 2026.

While growth in 2026 will be affected by external headwinds, Malaysia faces these challenges from a position of strength

Malaysia’s economy is expected to remain resilient in 2026, despite external risks from the ongoing geopolitical conflict in the Middle East.

BNM Governor Dato’ Sri Abdul Rasheed Ghaffour said Malaysia, as a small and open economy, would face both direct and indirect effects from the conflict. These include higher energy prices, supply chain disruptions and heightened uncertainty, which are expected to weigh on the external environment.

“Nevertheless, the Malaysian economy is expected to remain resilient in 2026, with growth expected to come in within the range of 4%–5%, supported by steady domestic demand and continued expansion in our export performance,” he said.

Domestic demand is expected to provide a buffer against external headwinds. Household spending will be supported by firm labour market conditions and continued policy support, while investment activity will be driven by progress in multi-year projects in both the private and public sectors, as well as the implementation of national master plans.

Exports are expected to continue benefiting from global technology expansion, particularly for E&E goods, reflecting Malaysia’s role in global value chains.

The 2026 inflation outlook remains contingent on evolving external cost conditions

Headline inflation is projected to average between 1.5% and 2.5% in 2026.

Following the Middle East conflict, inflation is expected to edge higher due to elevated global energy and other key commodity prices. Bank Negara Malaysia said this was broadly in line with expectations.

In the absence of excessive demand pressures, existing policy measures, including targeted fuel subsidies and other mitigation measures, are expected to help limit near-term spillovers to broader inflation.

However, the extent and pace of pass-through to domestic prices from the conflict will depend on firms’ pricing behaviour and demand conditions.

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