The recent escalation in the Middle East has caused high crude oil prices, which will have both positive and negative effects on Malaysia's economy. According to a report by the Socio Economic Research Centre (SERC), the first-order effect of higher oil prices will expand Malaysia's trade surplus as the country's oil and gas exports increase. However, the second-order effect of oil supply shocks will lead to rising energy prices, inflation, and a dampening of consumer spending and investment demand. This, in turn, will impact Malaysia's exports and put downward pressure on stock prices. RHB Investment Bank predicts that oil prices could reach as high as US$140 per barrel if the conflict between Israel and Iran intensifies [e027f6eb].
Despite the potential negative impact, the report also highlights that the targeted fuel subsidy rationalization in Malaysia will not result in a complete floating of retail petrol prices. Instead, there will be a gradual adjustment. The impact of targeted fuel subsidies on headline inflation is expected to be manageable, but there may be indirect impacts on other goods and services. As a response to the increase in inflation, Bank Negara Malaysia is not expected to raise interest rates [e027f6eb].