Bank Negara raises 2026 growth forecast to around 5%, above Finance Ministry projection

The Monetary Policy Committee kept the policy rate at 2.75%. Kenanga Research is more optimistic still, forecasting growth of 5.3%, while the Ministry of Finance expects growth of between 4.0% and 4.5%.

Bank Negara Malaysia now expects the economy to expand by around 5.0% in 2026, upgrading its earlier guidance that growth would remain within a range of 4.0% to 5.0%.

The Monetary Policy Committee left the Overnight Policy Rate unchanged at 2.75% at its September meeting, saying the stance remained consistent with continued price stability and sustainable growth. It retained its data-dependent approach, saying it would remain vigilant and assess the balance of risks surrounding inflation and growth.

Kenanga Research, which had expected the rate to be maintained, noted that the central bank's new forecast was above the Ministry of Finance's projection of between 4.0% and 4.5%.

The gap between two official forecasts

The difference between the forecasts of two arms of the same government is the most consequential aspect of the announcement.

The Ministry of Finance's forecast is not merely a private assessment. It underpins revenue assumptions on which Malaysia's budget is based. With the central bank now guiding to growth up to a full percentage point above the ministry's upper range, the figures may either signal that those assumptions will be revised or point to a discrepancy that will have to be reconciled when the next budget is prepared.

Anwar Ibrahim holds both the premiership and the finance portfolio, making the divergence an issue involving his own ministry's forecast rather than an inter-departmental dispute.

Neither institution has publicly addressed the gap.

Kenanga is more bullish

The research house's own forecast is more optimistic still, at 5.3% for 2026 compared with 5.2% in 2025. It attributed the outlook to stronger-than-expected performance in the first half of the year, supported by net exports and resilient domestic demand.

On that basis, Kenanga expects the central bank to keep the policy rate unchanged for the rest of the year, arguing that with growth assessed at around 5.0% and inflation well below levels that would warrant tightening, there is limited urgency for further adjustment.

The inflation picture — and an unusual feature

Headline inflation averaged 1.8% during the first seven months of 2026, while core inflation averaged 2.0%. July headline inflation was 1.8%.

⚠️ Core inflation running above headline inflation is unusual and worth noting. It indicates that underlying price pressures are somewhat firmer than the headline figure suggests, with volatile or administered components pulling the overall rate lower. This sits awkwardly alongside the central bank's second-quarter report, which recorded fuel inflation rising to 5% after increases in RON97 and diesel prices, compared with minus 1.5% in the first quarter.

Neither the central bank nor Kenanga has explained the composition, and the report does not speculate on it.

Bank Negara's own assessment is that the pass-through from higher costs to consumer prices has been limited, supported by domestic policy measures, stable demand conditions and limited spillover from export-led growth into wages.

What is expected to support growth

For 2027, the central bank expects growth to remain resilient, supported by electrical and electronics exports, continued strength in technology-related non-E&E shipments, sustained tourism spending, stable labour market conditions and continued investment.

It took a more constructive view of the global outlook, pointing to strong expansion in the technology sector, improving supply conditions and stable labour markets. Sustained technology-related spending is expected to cushion some of the impact of geopolitical uncertainty.

The risks identified

The committee described the balance of risks as broadly even.

Downside risks include prolonged geopolitical tensions, tighter global financial conditions and elevated financial market valuations. Domestically, the risks include an extended conflict in the Middle East and weaker commodity production. The central bank continues to see upside risks to domestic costs from the conflict if elevated global commodity prices persist.

Upside risks include stronger technology-related export demand, better-than-expected global growth, higher tourism activity, a faster recovery in global supply chains and pro-growth policies in major economies.

⚠️ One domestic risk does not appear on that list. An emergency was declared in Serian, Sarawak, this week after the Air Pollutant Index exceeded 500. Schools across the state had already been closed, while officials said non-essential work and outdoor activities could be halted above that threshold. Whether a haze episode of this severity will be reflected in the national accounts remains an open question — but "weaker commodity production" is on the central bank's own list, and the fires driving the haze are burning in plantations and peatland areas in the region.

What to watch

Whether the Ministry of Finance revises its forecast. The gap is a full percentage point at the upper bound. A revision would confirm that the central bank had signalled the stronger outlook first. If there is no revision and the budget remains based on growth of 4.0% to 4.5%, two official forecasts will remain in circulation.

Whether core inflation continues to exceed headline inflation. If it does, the question of its composition will become a policy issue, as core inflation is a key measure watched by central banks when deciding whether to adjust rates.

Whether the haze episode affects third-quarter data. Sarawak accounts for a substantial part of the national economy, and an emergency-level air quality event involving work stoppages is not a routine seasonal cost. The third-quarter figures, due in November, will show whether it has had an impact.

Originally published on IBTimes Malaysia