Organisation for Economic Co operation and Development（OECD）Recently, the Malaysia Economic Survey report was released, which pointed out that as the Malaysian government gradually cancels its fuel subsidy policy, the government should take precautions and consider further tightening monetary policy to effectively curb the possible upward pressure on prices.

This report emphasizes that although Malaysia's current monetary policy is considered appropriate and provides sufficient buffer space to cope with temporary inflation, the authorities should remain highly vigilant and be prepared to take interest rate hikes in the face of the potential second round of inflationary effects caused by future energy price increases. The OECD believes that although Malaysia's inflation rate is currently stable at around 2%, the trend of price growth still carries "significant risks" that need to be addressed with caution.

The Malaysian government has made a series of adjustments in fiscal policy in recent years, with the most notable being the gradual elimination of fuel subsidies. In June of this year, Malaysian Prime Minister Anwar Ibrahim announced the reform of the policy of fully subsidizing diesel retail prices, and instead provided diesel subsidies to specific groups through more precise mechanisms. This policy adjustment is seen as an important step for the government to reduce fiscal burden and promote sustainable economic development. However, with the gradual cancellation of subsidies, market concerns about future price increases are also increasing.

Analysts from Industrial Bank predict that the government may cancel subsidies for RON95 grade gasoline by the end of this year, which could have a significant impact on the inflation rate, pushing it up by 3.05 percentage points. This prediction further highlights the urgency of tightening monetary policy.

The OECD clearly stated in its report that the impact of canceling energy subsidies on inflation is highly uncertain, and may be temporary, but it may also trigger a more lasting second round of inflation effects, thereby pushing up the overall price level. Therefore, the organization calls on the Malaysian government to maintain policy flexibility during this critical period, avoid premature easing of monetary policy, and be prepared to quickly respond to any inflationary pressures that may arise from the proposed subsidy reform.

Faced with this challenge, the Malaysian government needs to find a suitable path between balancing economic growth and price stability. On the one hand, the government needs to continue to promote reforms in the fiscal and energy sectors, reduce financial burdens, and improve energy efficiency; On the other hand, the government also needs to closely monitor market dynamics, flexibly adjust monetary policy, ensure that price levels remain within a controllable range, and maintain economic and social stability and prosperity.

In the coming months, how the Malaysian government can balance the cancellation of fuel subsidies with maintaining price stability will become a focus of market attention. The OECD report undoubtedly provides important references and warnings for government decision-making.