The ongoing conflict in the Middle East has led to spillover effects beyond oil price fluctuations, increasing pressure on global supply chains. In March, Brent crude oil prices surged to approximately USD99 per barrel, a significant rise compared to the average of USD69 per barrel recorded in February. Disruptions at the Strait of Hormuz, a critical transit route for fertiliser, have also contributed to higher fertiliser prices. This has, in turn, raised production costs for agricultural commodities, including palm oil.

Domestically, inflationary pressures eased to 1.4% in February (Jan: 1.6%). This moderation was largely driven by slower price growth in major weighted components, including food and beverages, housing and utilities, as well as transportation. Looking ahead, headline inflation is expected to remain contained in the near term, supported by government measures — such as increased petrol subsidies — to cushion the impact of higher oil prices following the closure of the Strait of Hormuz in March. However, we remain cautious, as secondary effects may emerge from higher logistics costs and supply chain adjustments. Reflecting these risks, MARC Ratings revised its 2026 inflation forecast in mid March to 2.1% from 1.6%, alongside a revision to its GDP growth outlook, with a baseline projection of 4.4% (previously 4.6%) that could moderate to 4.2% should the war persist. These projections are broadly consistent with Bank Negara Malaysia’s (BNM) inflation range of 1.5%–2.5% and GDP growth forecast of 4%–5% for 2026, announced on 31 March.

In February, Malaysia’s exports moderated slightly, although growth remained in the double digits at 10.8% (Jan: 19.6%). Growth was driven primarily by the electrical and electronics (E&E) sector, which increased by 28.5% (Jan: 39.5%), as well as optical and scientific equipment, which grew by 42.9% in February (Jan: 36.2%). While a further escalation in Middle East tensions could weigh on Malaysia’s external demand, the outlook remains fluid, with the possibility of near term de escalation following Trump’s recent remarks on 1 April.

In February, foreign investors turned net sellers of Malaysian bonds, withdrawing RM2.5 billion (Jan: +RM1.0 billion), trimming foreign holdings of Malaysian Government Securities (MGS) and Government Investment Issues (GII) to 21.3% of the market (Jan: 21.5%). Equities, by contrast, saw a modest net inflow of RM0.2 billion (Jan: +RM1.0 billion). Looking ahead, the US–Israel war on Iran is likely to keep foreign bond inflows subdued in the near term as demand for safe-haven assets such as Treasuries rises. Nonetheless, while external headwinds warrant caution on near-term foreign flows, Malaysia’s robust macroeconomic backdrop should continue to underpin investor confidence in the local bond market. Additionally, as of end March, the ringgit had depreciated by approximately 3.0% month-to-date against the greenback, trading at around 4.05 USDMYR. The ringgit’s depreciation primarily reflects stronger safe haven demand for the US dollar amid heightened geopolitical risks in the Middle East, along with shifting expectations for US monetary policy. On 18 March, MARC Ratings had widened the ringgit’s projected trading range to 3.92–4.07 USDMYR, from 3.88–3.98 USDMYR previously.

MGS yields rose marginally by 2–18 bps across the curve month to date as of late March. The uptick in yields primarily reflects expectations of higher inflation amid escalating geopolitical tensions in the Middle East. On 5 March, BNM maintained the Overnight Policy Rate (OPR) at 2.75%. MARC Ratings opines that BNM may maintain the OPR at this rate through 2026, balancing heightened external risks to growth and potential inflationary pressures. We also expect the 10 year MGS yield to gravitate towards a short-term equilibrium range of 3.60%–3.70%, from the earlier full year 2026 forecast of 3.35%–3.40%.