Kuala lumpur: Malaysia is in a position of strength as it faces oil price shocks following the West Asia conflict, supported by robust domestic demand, moderate inflation, a sound financial sector, and a resilient external position. Bank Negara Malaysia (BNM) stated that the country's status as a net energy exporter also provided some buffer against external headwinds.

According to BERNAMA News Agency, BNM emphasized the importance of remaining vigilant to the rapidly evolving nature of this conflict. The central bank expressed its readiness to ensure that monetary policy remains supportive of the economy while safeguarding price stability, as detailed in the Economic and Monetary Review 2025 released today.

Since February 28 this year, geopolitical tensions in West Asia have escalated sharply, leading to the onset of military conflict and disrupting regional oil and gas production, as well as associated supply chain and logistics. As a result, concerns over safety, rising insurance costs, and the subsequent withdrawal of major commercial shipping operators have significantly disrupted maritime traffic through the Strait of Hormuz, which sees nearly 20 percent of the global oil supply daily.

BNM highlighted that the overall impact of the conflict on Malaysia would depend on its duration, the severity of the disruption, and how far it affects global energy production and logistics. The central bank also noted that during previous episodes of military conflict, such as the Gulf War in 1990 and the Russia-Ukraine conflict in 2022, oil prices increased significantly for three to six months before gradually declining to their pre-conflict level. However, BNM acknowledged that outcomes have varied across different episodes, and the current West Asia conflict could unfold differently.

BNM projected that if hostilities remain contained and gradually de-escalate, disruptions may be short-lived, characterized by temporary production outages and partial shipping disruptions through the Strait of Hormuz. In such circumstances, strategic reserves could help cushion near-term supply shortfalls, with oil prices settling at elevated but manageable levels, limiting spillovers to global growth, trade, and inflation.

Conversely, the central bank warned that more persistent disruptions could result in prolonged maritime traffic disruptions, sustained damage to energy infrastructure, and extended production shutdowns across major Gulf producers. This scenario could keep oil prices elevated for longer, dampen external demand, and weigh on global trade and growth. Domestically, elevated energy and input costs could increase the likelihood of broader cost pass-through to consumer prices, posing risks of more persistent inflationary pressures, eroding household purchasing power, and amplifying the drag on domestic demand.

BNM stated that as a small open economy, Malaysia's growth and inflation outlook is sensitive to geopolitical and global energy price developments. The conflict affects the domestic economy primarily through three key channels: higher energy prices raising import costs and exerting upward pressure on domestic production costs and consumer prices, which could dampen household spending and business activity; weaker external demand following oil price shocks weighing on exports and overall growth; and elevated oil prices and heightened uncertainty increasing risk aversion, prompting a shift towards safe-haven assets, leading to more volatile capital flows across emerging markets, including Malaysia, with potentially adverse spillovers on domestic financial conditions and exchange rate.

However, BNM noted that these effects might be partly mitigated by higher commodity-related export earnings, given Malaysia's position as a net energy exporter. It added that existing targeted fuel subsidies would also help cushion the transmission of higher global energy prices to domestic inflation and the economy.