OPR Held at 2.75%, But PPI-CPI Gap Signals Distortion, Writer Says
Commentator Mazli Noor argues the overnight policy rate alone cannot fix the widening divergence between producer costs and consumer inflation.
Bank Negara Malaysia (BNM) has held the overnight policy rate (OPR) at 2.75% following its latest monetary policy committee meeting, but the rate cannot control every economic parameter, writer Mazli Noor argues in an opinion piece published by Free Malaysia Today.
He points to the producer price index (PPI), the leading indicator of inflation for manufacturers, which rose 9.2% year-on-year in June 2026, up 0.6% from May. Headline inflation, by contrast, was flat at 1.9% in June against 2% in May.
"This divergence points to a distortion in the Malaysian economy," he writes, with producers facing genuinely rising costs that are not being passed on to consumers. Someone must eventually bear them — either producers absorbing thinner margins, or taxpayers funding the subsidies masking the pressure.
Fiscal support is the main reason, he says. The subsidy bill rose to RM35 billion-RM40 billion in 2025, while costs tied to the Middle East crisis require a further RM7 billion a month for RON95 petrol and diesel subsidies alone, pushing estimated total subsidies for 2026 to RM58.4 billion. Direct cash assistance in 2026 is expected to reach RM15 billion, the largest amount the government has ever committed to.
Other explanations include producers absorbing costs to protect their customer base, or still drawing on older, cheaper raw material inventory — both temporary.
Only two outcomes resolve the gap, he writes: the PPI must come down, or inflation must rise to meet it. While the OPR can shape the consumer price index through liquidity, the PPI is driven by external markets — complex supply chains, geopolitical conflict and volatile global oil and mineral prices, all beyond domestic interest rates.
At best, the OPR has a limited, indirect effect, such as supporting the ringgit to lower import costs, though raising it risks dampening the domestic economy.
BNM must still monitor the PPI trend for signs of a second round of inflation, he says. Beyond monetary policy, he calls for consistently higher productivity — particularly in construction and manufacturing, where the productivity index sits at just 1.4% — a stronger ringgit, and investor confidence built on anti-corruption efforts, transparent governance and fiscal discipline.
The views expressed are those of the writer, who serves on the boards of several public and private companies.
This article was produced with the assistance of artificial intelligence (AI), in accordance with our editorial policy.