Bank Negara Malaysia (BNM) has reaffirmed its projection for steady economic growth this year, supported by strong domestic demand despite rising external challenges.

In its Economic and Monetary Review report released on Monday, the central bank reiterated that GDP growth for 2025 is expected to range between 4.5% and 5.5%, aligning with the Ministry of Finance’s Budget 2025 forecast.

In 2024, Malaysia's economy grew by 5.1%.

“In the face of external uncertainties, domestic demand is expected to remain Malaysia’s anchor of growth amid steady private sector expenditure,” BNM stated.

Household spending is projected to rise, supported by employment growth, higher incomes, and policy measures, while investment activity is expected to expand strongly as the economic upcycle continues into 2025, according to the central bank, The Edge Malaysia reports.

However, export growth is likely to remain moderate. Unemployment is forecast to improve to 3.1% this year, approaching the 3% level typically seen as full employment by economists.

Furthermore, inflation is expected to rise this year, in line with previous projections.

The consumer price index (CPI), Malaysia’s primary inflation measure, is forecast to increase between 2.0% and 3.5%, while core inflation is anticipated to range from 1.5% to 2.5%.

In 2024, both headline and core inflation stood at 1.8%.

The central bank highlighted that the broader forecast range accounts for the potential effects of key policy reforms, including the rationalisation of RON95 fuel subsidies, the expansion of the sales and service tax (SST), and wage-related measures.

“The impact of policy measures [on] inflation is subject to details surrounding implementation. The effects, however, are expected to be transitory and manageable,” the central bank said.

Moreover, BNM stated that the direct impact of a one-time RON95 fuel price adjustment on inflation is expected to dissipate a year after its implementation. The planned SST expansions will mainly target non-essential food items and durable goods, which represent “a small subset of the CPI basket,” the bank noted.

In addition, the central bank stated that the indirect effects on inflation, through spillovers to the prices of other goods and services, will also be largely contained.

However, BNM warned that there could be upward risks to inflation if domestic reforms occur in a stronger-than-expected demand environment, where businesses may find it easier to increase prices and pass on costs to consumers.

“This may lead to knock-on effects on the prices of other goods and services, contributing to pressures on underlying inflation. The degree of these interactions and spillovers are expected to be reflected in the pervasiveness and persistence of inflation, which are monitored very closely,” BNM said.