A strengthening El Niño could intensify food inflation across ASEAN and India, potentially keeping regional central banks on a tightening path, although Malaysia’s overall exposure is relatively moderate compared with the Philippines, India and Thailand, according to OCBC Global Markets Research.
In a report dated Sept 9, OCBC said El Niño is likely to act primarily as an inflation shock rather than a broad growth shock, with rice, wheat, maize and vegetable oils among the commodities most exposed to weather-related supply disruptions.
The bank identified the Philippines as the most vulnerable economy, followed by India and Thailand, while Indonesia faces moderately high exposure. Malaysia and Vietnam were classified as having moderate exposure, with risks concentrated in particular sectors.
OCBC said El Niño is already firmly established and is expected to strengthen substantially over the coming months. Citing World Meteorological Organization forecasts, it said there is a near-100% probability that the phenomenon will persist through September-November 2026 and December 2026-February 2027, with further strengthening expected before a peak towards the end of this year.
Malaysia Faces Food Inflation Risk, But Palm Oil Provides Offset
For Malaysia, OCBC sees the principal vulnerability coming through food prices and import dependence rather than a major economy-wide growth impact.
The research house said Thailand, the Philippines, India and Malaysia appear among the Asian economies most vulnerable from a food-inflation perspective, reflecting differences in food’s weight within consumer price baskets, import dependence and government intervention.
Rice is one particular area of concern. OCBC noted that Malaysia, the Philippines and Indonesia are exposed to potential terms-of-trade shocks from higher rice prices because they are net importers.
Malaysia’s rice inventories were estimated at 292,000 tonnes, equivalent to a stocks-to-use ratio of 9.4% and about 34 days of consumption cover, according to USDA data cited in the report.
However, Malaysia’s position as a major palm oil exporter provides an important counterweight.
OCBC expects crude palm oil prices to average RM4,450 per tonne in 2026, up from RM4,280 in 2025, with risks skewed to the upside. Higher palm oil prices could partially offset deterioration in Malaysia’s food import bill, while countries such as India and the Philippines would face a greater negative terms-of-trade impact.
Agriculture Likely To Bear Brunt Of Growth Impact
OCBC said historical El Niño episodes have generally had a greater impact on inflation than overall economic growth.
The direct economic effects tend to be concentrated in agriculture through lower rainfall, weaker crop yields and reduced reservoir levels, before feeding into food inflation, household purchasing power and trade.
India, Indonesia, the Philippines, Thailand and Vietnam are considered more vulnerable to production losses and weaker rural incomes because of the larger role agriculture plays in their economies.
Manufacturing- and services-oriented economies should experience a more limited direct growth impact, although they remain exposed to higher import costs and weaker regional demand.
OCBC cautioned that the growth impact could become more serious if drought conditions persist long enough to affect electricity generation, water availability and broader supply chains.
The climate event also comes as the global economy is already confronting multiple supply-side risks. OCBC pointed to US tariffs, the closure of the Strait of Hormuz and renewed Russia-Ukraine tensions alongside El Niño, with global food prices already increasing for cereals, sugar and cooking oils.
Rice, Maize And Wheat Under Pressure
Agricultural commodities are expected to be the primary transmission channel.
Historical evidence cited by OCBC suggests maize yields could decline by as much as 4.3% globally during El Niño, while wheat yields also typically weaken. Renewed Russia-Ukraine tensions have separately pushed global wheat prices higher since July, adding another source of imported inflation for ASEAN economies that depend heavily on grain imports.
Regional governments are already warning about agricultural risks.
OCBC noted that Malaysian Prime Minister Datuk Seri Anwar Ibrahim had in July ordered urgent measures to safeguard the country’s food supply, while authorities elsewhere in the region have warned of potential declines in rice and other agricultural production.
The Philippines has warned that a severe El Niño could reduce national rice production by as much as 700,000 tonnes, while Thailand expects output to fall by about 20%. In Vietnam’s Mekong Delta, drought could affect around 350,000 hectares of winter-spring rice.
The eventual inflation impact could also be amplified by government responses rather than crop losses alone. OCBC warned that export restrictions, stockpiling and other food-security measures could exacerbate supply disruptions and push prices higher.
OCBC Sees BNM Rate At 3% In 2027
Persistent food inflation could also complicate monetary policy.
OCBC said central banks may initially look through temporary weather-related price increases, but sustained food inflation could spill into core prices through higher inflation expectations and wage adjustments.
“El Niño strengthens the case for a cautious monetary-policy stance,” the research house said.
OCBC maintains its view that central banks across ASEAN-5 and India will continue tightening monetary policy in response to rising price risks amid resilient economic growth. Its baseline calls for further rate increases during the remainder of 2026 and/or 2027.
For Malaysia, OCBC expects Bank Negara Malaysia’s policy rate to remain at 2.75% at end-2026 before rising to 3.00% in 2027.
It also forecasts Indonesia’s policy rate at 6.50% by end-2026 before easing to 6.00% in 2027, while the Philippines is projected at 5.50% and 5.00%, respectively. Thailand’s rate is expected to remain at 1.00% this year before increasing to 1.50% in 2027.
Fiscal measures, meanwhile, are likely to provide the first line of defence against food-price spikes, including subsidies, releases from strategic food stocks and import liberalisation. OCBC sees less scope for outright cash assistance given elevated fiscal deficits and ongoing consolidation priorities across the region.
Overall, OCBC’s composite El Niño exposure index places Malaysia and Vietnam in its Tier 4, or moderate-risk category, reflecting concentrated sectoral vulnerabilities and relatively low rice buffers, partly offset by their agricultural export positions.
The Philippines sits alone in the very-high-risk category, followed by India and Thailand at high risk and Indonesia at moderately high risk.
