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Source: Bloomberg

The Malaysian ringgit, Asia's top-performing currency last year, has further potential to strengthen as the nation's economy continues to show robust growth, according to Finance Minister II Datuk Seri Amir Hamzah Azizan.

In a recent interview, the finance minister suggested that official growth forecasts may soon be revised upward. He argued that the ringgit was undervalued in the past year and the market is now adjusting to its fundamental strength. This momentum is supported by January's capital inflows into Malaysia's equity and bond markets, a trend he expects to continue.

"I think the ringgit still has potential because growth is still intact in this country and it's still growing well," Amir Hamzah stated. The currency pared its losses during his remarks, trading at 3.9437 against the dollar in Kuala Lumpur.

A Resilient Economy Powers the Currency

Malaysia's economy has demonstrated impressive resilience, weathering challenges like US tariffs that have impacted global trade. This strength has allowed the central bank to hold its benchmark interest rate steady since July.

Economic performance is outpacing much of Southeast Asia, driven by several key factors:

• Strong Domestic Demand: Local consumption remains a solid foundation for growth.

• Strategic Investments: The country is attracting capital into high-value sectors like electronics, data centers, and energy transition projects.

In 2025, Malaysia's economy expanded by 4.9%, exceeding the government's own forecast of 4% to 4.8%. While the official projection for this year is a more moderate 4% to 4.5%, Amir Hamzah expressed optimism that Bank Negara Malaysia could raise this estimate in its upcoming review. He also noted a lack of catalysts that would cause inflation to rise this year.

Central Bank Holds a Steady Course

Bank Negara Malaysia (BNM) is focused on maintaining stability to support the economy. BNM Governor Datuk Seri Abdul Rasheed Ghaffour recently stated that while uncertainty remains high, he is "cautiously optimistic" about 2026.

"What's important for us is to ensure that we provide a conducive environment from monetary stability and financial stability for us to be able to achieve sustainable growth," he explained.

This sentiment is shared by the private sector. Datuk Seri Khairussaleh Ramli, CEO of Malayan Banking Bhd (Maybank), the country's largest bank, anticipates that BNM will likely keep interest rates unchanged throughout the year as economic growth moderates.

Fiscal Discipline and Diversification

The ringgit’s rally—up 3% this year after a nearly 10% gain in 2025—is not just a story about a weaker dollar. It is rooted in structural improvements, rising investment, and a clear government agenda for fiscal consolidation.

Prime Minister Datuk Seri Anwar Ibrahim's administration aims to narrow the budget deficit to 3.5% of GDP this year, down from a target of 3.8% in 2025. Amir Hamzah confirmed the 2025 target was "within reach," with final figures expected by the end of February. This commitment to fiscal health is designed to boost investor confidence.

A core part of this strategy is a deliberate shift away from reliance on petroleum-related revenue. The government is focused on diversifying its economic base, improving tax collection, and reducing subsidy spending.

"The key for Malaysia was the diversification," said Amir Hamzah. "The more we push for economic diversification, the more we improve our fiscal space and tax collections, the resilience of the fiscal space of the government is much better."

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Source: CNBC

UK inflation unexpectedly rose for the first time in five months, climbing to 3.4% in December and complicating the timeline for a potential interest rate cut from the Bank of England.

Data from the Office for National Statistics (ONS) confirmed the annual inflation rate, as measured by the consumer prices index (CPI), increased from 3.2% in November. This figure surpassed City economists' forecasts of a more modest rise to 3.3% and marks a reversal after months of falling or stagnant price growth.

While analysts believe the uptick is likely temporary, financial markets have almost entirely priced out the possibility of an interest rate cut by the Bank of England next month.

What's Driving the Price Spike?

The December inflation increase was largely fueled by volatile items and specific policy changes, rather than a broad resurgence in price pressures.

Key drivers include:

• Air Fares: A significant 28.6% surge in air travel costs occurred in December. While flight prices typically jump over the Christmas holiday, the increase was magnified when compared to an unusually low base in 2024.

• Tobacco Duties: Higher taxes on tobacco products, introduced by Chancellor Rachel Reeves in the autumn budget, took effect in December and contributed to the headline rate.

Martin Beck, chief economist at WPI Strategy, advised against alarm, stating, "December's uptick in inflation should not set alarm bells ringing. The increase was largely driven by temporary and technical factors, not a broader resurgence in price pressures."

A Deeper Look at the Inflation Data

Beneath the headline figure, the details paint a more complex picture of the UK economy. Core inflation, which excludes volatile food and energy prices, remained unchanged from November at an annual rate of 3.2%. This stability suggests underlying price pressures may not be accelerating.

However, the cost of groceries continued to climb over the holiday period. Annual food inflation rose to 4.5% from 4.2% in November, with the ONS highlighting rising prices for bread and cereals as a primary factor.

Figure 1: UK food inflation rose to 4.5% in December, with the ONS identifying rising prices for bread and cereals as a key driver.

Services inflation, a key metric for the Bank of England, edged up from 4.4% to 4.5%. Although this measure is watched closely for signs of domestic price pressures, the December rise was smaller than economists had feared.

Yael Selfin, chief economist at KPMG UK, noted that the Bank of England would likely look through this increase. "Despite services inflation increasing in December, this was not reflective of domestically generated price pressures and was largely driven by volatile categories, such as air fares," she said, adding that slowing wage growth should help ease services inflation in the coming months.

Bank of England Rate Cut Timeline Pushed Back

The stronger-than-expected CPI reading has prompted the Bank of England's Monetary Policy Committee (MPC) to maintain a cautious stance. City traders now see an interest rate cut in February as highly unlikely and are not fully pricing one in until June.

Despite the market's reaction, many economists still forecast a potential rate cut in April, provided that UK price and wage growth continue to soften. Bank of England Governor Andrew Bailey stated last month that he expects inflation to return to the MPC's 2% target by the middle of this year.

Economic Outlook and Government Response

Chancellor Rachel Reeves, who has made tackling the cost of living a central theme, pledged that 2026 would be the "year that Britain turns a corner" on inflation. "My number one focus is to cut the cost of living," she said, referencing measures from the budget including discounts on energy bills and freezes on rail fares and prescription charges.

In a separate report, the ONS revealed that private rental price growth is slowing. Average monthly rents increased by 4% in the year to December, down from 4.4% in November and the slowest pace since May 2022. Property portal Zoopla attributes this shift to an increase in available rental homes, as more first-time buyers are leaving the rental market due to improved mortgage conditions and slower house price growth.

Political turbulence is rattling UK markets, with fresh doubts over Prime Minister Keir Starmer’s leadership sending the pound and long-term government bonds tumbling on Thursday.

Investors are increasingly pricing in a political risk premium as Starmer faces mounting pressure over his decision to appoint Peter Mandelson as US ambassador, despite his known connection to the disgraced financier Jeffrey Epstein. The market fallout signals growing concern that the Prime Minister’s grasp on power is weakening.

UK Yield Curve Steepens as Pound Falters

The market reaction was swift and clear. Sterling dropped as much as 0.4% to a near two-week low of US$1.36, making it the worst-performing currency among its peers.

In the bond market, the yield on 10-year government bonds, or gilts, climbed by four basis points to 4.59%. Because shorter-term rates remained relatively stable, the gap between the two-year and 10-year gilt yields widened to 86 basis points—its most substantial spread since 2018.

Figure 1: The spread between UK 2-year and 10-year gilt yields surged to 86 basis points, its highest level since 2018, as political uncertainty spooked investors in long-term debt.

"It's worth keeping a closer eye on the UK with PM Starmer under considerable domestic pressure," noted Jim Reid, global head of macro research at Deutsche Bank AG. He added that the weakness in gilts reflects investor concern that "he could be replaced."

Monetary Policy vs. Political Risk

The divergence in bond yields highlights where investors are focusing their attention. Longer-dated debt is highly sensitive to political and fiscal risk, while shorter-dated notes are primarily driven by central bank policy.

With the Bank of England expected to hold interest rates steady on Thursday, the front end of the yield curve has been anchored. "While gilts are watching politics, the front-end will be paying attention to today's BOE meeting," said Jamie Searle, a strategist at Citigroup Inc.

Searle explained that with recent UK data surprising to the upside, there is little pressure on the Monetary Policy Committee to act. "Yesterday's rise in political uncertainty adds to the cheapening," he added, referring to the sell-off in longer-term gilts.

Market Anxiety Over a Post-Starmer UK

For investors, the instability is not just about a potential leadership change but what might follow. The market consensus is that any replacement for Starmer or his chancellor, Rachel Reeves, would be less committed to the UK's current fiscal rules.

"This is negative for the currency not simply because political instability is undesirable, but because any change in leadership is likely to be interpreted as fiscally expansionary," one analyst noted. "Given the UK's long-standing challenges around debt financing, markets will undoubtedly react negatively to such developments."

This sensitivity has been tested before. Just two weeks ago, gilts sold off after a potential path opened for Greater Manchester Mayor Andy Burnham, a left-wing rival of Starmer, to return to Parliament. Burnham, who has criticized the UK's deference to financial markets, is seen as a potential challenger for the premiership.

The political headwinds arrive at a difficult time for Starmer, whose Labour party is struggling with dire polling numbers and who faces a record disapproval rating himself ahead of local elections in May.

Czech headline inflation plunged to a nine-year low of 1.6% year-on-year in January, a development fueled by falling energy costs that has intensified the debate over future interest rate cuts.

The preliminary data was released just as the Czech National Bank (CNB) convened for a policy meeting. The central bank has kept its main interest rate on hold at 3.50% since May 2025. That decision followed an easing cycle that began in 2023, which halved the rate from its 7.00% peak reached during the 2022-2023 inflation surge.

Inflation Plunges Below Expectations

According to the statistics office's flash estimate, the 1.6% annual inflation rate for January was slightly below the 1.7% forecast in a Reuters poll. Month-on-month, prices rose by an expected 0.9%.

Inflation has remained close to the central bank's 2% target since 2024, following a period where price growth reached double-digit levels.

Figure 1: Czech year-on-year inflation peaked near 18% in 2023 before a rapid descent brought the rate to its current multi-year low, stabilizing near the central bank's 2% target since 2024.

Sticky Service Prices Complicate CNB's Decision

Despite the sharp drop in the headline number, policymakers remain cautious due to underlying price pressures. A key concern is inflation in the services sector, which remained high at 4.7% year-on-year. Analysts agree that elevated core inflation and persistent price growth in services give the central bank reasons to remain vigilant.

The recent decline in energy costs was significantly influenced by a government policy decision. The administration of Prime Minister Andrej Babis shifted the burden of payments for renewable energy from households and companies to the state budget. The central bank typically does not adjust policy based on the primary impact of such regulatory changes.

In December, Governor Ales Michl confirmed the bank would not react to the measure and noted that inflation could fall below its target.

Rate Cut Outlook: A Shift in Tone?

Analysts believe price growth will likely remain below 2% for a sustained period. While most expect the central bank to hold rates steady at Thursday's meeting, the probability of a rate cut later this year is growing.

The discussion has gained momentum after some policymakers floated the possibility. In a late January interview with Reuters, Vice-Governor Jan Frait said the bank could discuss slight monetary easing, citing external factors that might lead other major central banks to cut rates.

This sentiment was echoed in market analysis following the latest inflation data.

"The probability of a further decrease in CNB interest rates this year has increased significantly," said Jan Bures, an economist at CSOB bank.