By Rozanna Latiff and Danial Azhar
KUALA LUMPUR, March 31 (Reuters) - Malaysia's economy is on track to grow faster in 2026 than initially projected, the central bank said on Tuesday, despite trade disruptions and higher fuel prices caused by the conflict in the Middle East and U.S. tariffs.
Bank Negara Malaysia now expects economic growth of between 4%-5% this year, revising its forecast slightly upwards from 4%-4.5%, according to documents released along with its annual report for 2025.
The central
bank flagged risks to growth and inflation from the surge in oil prices, saying the overall impact will depend on the duration and severity of the war.
"Malaysia is facing the conflict from a position of strength, characterised by robust domestic demand, moderate inflation, a sound financial sector and a resilient external position," the central bank said in its 2025 economic and monetary review.
The increase in the top end of the growth forecast is at odds with expectations in other countries that activity will be hit by the Middle East war.
UPBEAT GROWTH OUTLOOK
BNM said domestic financial conditions are expected to remain favourable due to strong economic fundamentals, a deep domestic institutional investor base and a well-capitalised banking system, a combination that has drawn foreign interest.
Malaysia's status as a net energy exporter will also provide some buffer against the impact of the Middle East conflict, BNM added.
Growth in 2026 will be supported by strong household spending, investments, sustained demand for electrical and electronic exports, and steady tourism, the central bank said.
The economy grew by 5.2% in 2025, surpassing expectations, with the country also seeing a record value of trade and approved investments last year.
Inflation was expected to remain moderate in 2026 in part due to policies aimed at cushioning the impact of rising commodity and energy prices, BNM said.
Malaysia's subsidy bill has soared since the war began. The government is now expected to spend 4 billion ringgit ($994 million) a month, compared to 700 million ringgit previously, to maintain a fixed price for the widely used RON95 transport fuel as well as provide cash assistance for some diesel vehicle operators.
Headline inflation is expected to average between 1.5% to 2.5% in 2026, ticking up from 1.4% last year, the central bank documents showed.
Core inflation is forecast to average between 1.8% to 2.3% this year, compared to 2% in 2025.
MONETARY POLICY TO SUPPORT GROWTH
BNM said it was ready to respond to developments in the Middle East war.
"We also stand ready – as we have through successive periods of heightened uncertainty – to ensure orderly markets and manage risks of excessive volatility," it said.
BNM kept its key interest rate unchanged at 2.75% for the fourth straight meeting earlier this month. It last cut its main policy rate in July 2025 after U.S. President Donald Trump imposed steep tariffs on most trading partners.
The U.S. tariff on Malaysia was later reduced to 19% as part of a trade deal. After the U.S. Supreme Court last month ruled the tariffs to be illegal, Trump imposed a 10% global import duty lasting 150 days, forcing policymakers to assess the implications for Malaysia's export-driven economy.
($1 = 4.0260 ringgit)
(Reporting by Danial Azhar and Rozanna Latiff; Editing by John Mair)
