BNM’s concerns about economic growth stemmed from global uncertainties relating to geopolitical tensions and US tariffs that can dampen the trade-dependent economy. This is despite still resilient domestic demand supported by continued household spending and investment expansion. The 25% US tariff to be imposed on imported Malaysian goods starting August 1 poses significant downside risks to Malaysia’s exports performance, in our view. The slightly higher revised tariff rate than the 24% rate threatened on Liberation Day was unexpected, given ongoing negotiations between Kuala Lumpur and Washington. Although Malaysian authorities will continue to engage US counterparts to lower tariffs, we foresee considerable uncertainties, particularly regarding potential US sectoral tariffs. On July 8, the Trump administration threatened potential US semiconductor tariffs, a sector that Malaysia is highly exposed to, in addition to tariffs on copper and pharmaceuticals. Against challenging external conditions, manageable inflation will continue in 2H25, due to contained global commodity prices and a lack of excessive domestic demand pressures, despite potential domestic policy shifts from RON95 subsidy rationalisation. This will provide room for more accommodative monetary policy, at a time when the Malaysian ringgit is also well-behaved. Bets of further rate reductions spurred by BNM’s dovish stance could result in returning foreign portfolio inflows into Malaysia’s government debt securities, reversing the temporary outflows in June 2025.
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