Malaysia’s 2024 GDP advance estimate read 5.1%, within the official projection and MARC Ratings’ forecast. This sustained growth was primarily driven by robust domestic demand, including strong consumer spending, and a resilient services sector. Overall business activity remained healthy, supported by a sharp 16.9% rise in exports in December. The strong overall exports, despite a slight decline in exports to China, reflected the diversification of trading partners.

Foreign outflows from Malaysia’s bond and equity markets continued throughout 4Q2024, driven by concerns that Trump’s tariff and fiscal policies would prove inflationary, leading to higher yields in US assets and attracting capital away from emerging markets. However, Malaysia’s foreign outflows slowed slightly in December compared to November. The 10-year US Treasury yields and the Dollar Index retreated from their interim peak on January 13, as Trump implemented lower-than-expected tariffs of 10% on China, somewhat easing inflation concerns for now. Concurrently, the USDMYR is expected to stabilise near the RM4.50 level.

However, overall US interest rate expectations remain hawkish, with the Federal Reserve’s increased expectations of higher rates by end-2025 and end-2026, further supporting capital flows to US assets. Expectations of US rate cuts have continued to lower, with financial markets pricing in just one to two rate cuts in 2025. Meanwhile, the eurozone’s growth remained weak and is expected to approach just 1% in 2025, compared to a more than 2% growth in the US, supporting dominance of the US dollar.

We believe Bank Negara Malaysia is likely to maintain the overnight policy rate at 3% in 2025, as any increase in the inflation rate is anticipated to be temporary amid healthy GDP growth. Notably, Malaysia’s inflation rate for 2025 is projected at 2.6%, alongside sustained GDP growth of 5.0%.