KUALA LUMPUR - MALAYSIA'S central bank cut its key rate to 3.25 per cent from 3.50 per cent on Monday, the first rate change in over 2 years and the first cut in over 5 years, and signalled it was ready to cut further.

A cut has been on the cards since last month's rate meeting when Central bank Governor Zeti Akhtar Aziz signalled the bank was moving from concerns over inflation to worries that the export-driven economy would be hit by slowing global growth.

Most economists in a Reuters poll had however expected rates to be left unchanged on Monday for the 21st rate meeting in a row, albeit by a narrow margin of 6-5.

'The risk to domestic price stability is now substantially reduced,' the central bank said in a statement.

'Bank Negara Malaysia will monitor closely the evolving developments and will undertake the appropriate policy response to avoid a severe economic downturn,' it said.

Official government forecasts put economic growth in 2009 at 3.5 per cent, down from 5.4 per cent seen this year, but some think it will be far worse as the export-dependent economy gets battered by the global financial storm and recession.

Local investment bank RHB sees growth at just 1.5 per cent in 2009.

'We are predicting at least another 50 basis point cut, we're forecasting 2.75 per cent OPR (Malaysia's key overnight policy rate). I think the economy is declining (more) sharply than anticipated,' said Citigroup economist Kit Wei Zheng.

The central bank also cut commercial banks' reserve requirement to 3.5 per cent from 4.0 per cent, enabling banks to lend at a lower cost, thus boosting liquidity.

HSBC, which also expects the central bank to ease rates by a further 50 basis points in the coming months, said the bank had cut rates to prevent economic growth from slipping below 4 per cent.

'As for the 50bp (basis points) reserve requirement cut, this is likely to reflect the recognition that liquidity is tightening in the banking sector with potential real economic consequences,' said HSBC economist Robert Prior-Wandesforde.

Inflation eases, economic outlook grim

The central bank said inflation had peaked and would moderate 'significantly' going into the second half of 2009, and it was open to further easing in case the economy worsened.

As inflation surged to near 27-year highs of 8.5 per cent in July and August as a result of the partial removal of fuel subsidies, the central bank came under fire for not hiking rates but said it was looking through what it believed was a blip.

The latest data showed inflation in October was 7.6 per cent year-on-year.

'It (Monday's rate cut) underscores the darkening economic outlook and the relief on inflation that allows them to take this easing step. We expect similar steps by some of the other Asean central banks, including Thailand next week,' said Action Economics' David Cohen.

Central banks around the world cut rates recently due to increasing economic growth risks, but Malaysia had resisted the pressure to cut its key rate, which is one of the lowest in the region.

Asian countries are stepping up efforts to fight slowing economic growth due to lower global demand and lack of investor confidence in markets.

Thailand, which posted economic growth of less than one per cent in the third quarter, is poised to cut rates while South Korea's central bank pledged to provide up to half of a planned $6.7 billion fund to aid borrowers.

Malaysia last cut rates in May 2003 to prop up an economy hit by the Sars health scare. It last raised rates in April 2006. -- THOMSON REUTERSKUALA LUMPUR - MALAYSIA'S central bank cut its key rate to 3.25 per cent from 3.50 per cent on Monday, the first rate change in over 2 years and the first cut in over 5 years, and signalled it was ready to cut further.

A cut has been on the cards since last month's rate meeting when Central bank Governor Zeti Akhtar Aziz signalled the bank was moving from concerns over inflation to worries that the export-driven economy would be hit by slowing global growth.

Most economists in a Reuters poll had however expected rates to be left unchanged on Monday for the 21st rate meeting in a row, albeit by a narrow margin of 6-5.

'The risk to domestic price stability is now substantially reduced,' the central bank said in a statement.

'Bank Negara Malaysia will monitor closely the evolving developments and will undertake the appropriate policy response to avoid a severe economic downturn,' it said.

Official government forecasts put economic growth in 2009 at 3.5 per cent, down from 5.4 per cent seen this year, but some think it will be far worse as the export-dependent economy gets battered by the global financial storm and recession.

Local investment bank RHB sees growth at just 1.5 per cent in 2009.

'We are predicting at least another 50 basis point cut, we're forecasting 2.75 per cent OPR (Malaysia's key overnight policy rate). I think the economy is declining (more) sharply than anticipated,' said Citigroup economist Kit Wei Zheng.

The central bank also cut commercial banks' reserve requirement to 3.5 per cent from 4.0 per cent, enabling banks to lend at a lower cost, thus boosting liquidity.

HSBC, which also expects the central bank to ease rates by a further 50 basis points in the coming months, said the bank had cut rates to prevent economic growth from slipping below 4 per cent.

'As for the 50bp (basis points) reserve requirement cut, this is likely to reflect the recognition that liquidity is tightening in the banking sector with potential real economic consequences,' said HSBC economist Robert Prior-Wandesforde.

Inflation eases, economic outlook grim

The central bank said inflation had peaked and would moderate 'significantly' going into the second half of 2009, and it was open to further easing in case the economy worsened.

As inflation surged to near 27-year highs of 8.5 per cent in July and August as a result of the partial removal of fuel subsidies, the central bank came under fire for not hiking rates but said it was looking through what it believed was a blip.

The latest data showed inflation in October was 7.6 per cent year-on-year.

'It (Monday's rate cut) underscores the darkening economic outlook and the relief on inflation that allows them to take this easing step. We expect similar steps by some of the other Asean central banks, including Thailand next week,' said Action Economics' David Cohen.

Central banks around the world cut rates recently due to increasing economic growth risks, but Malaysia had resisted the pressure to cut its key rate, which is one of the lowest in the region.

Asian countries are stepping up efforts to fight slowing economic growth due to lower global demand and lack of investor confidence in markets.

Thailand, which posted economic growth of less than one per cent in the third quarter, is poised to cut rates while South Korea's central bank pledged to provide up to half of a planned $6.7 billion fund to aid borrowers.

Malaysia last cut rates in May 2003 to prop up an economy hit by the Sars health scare. It last raised rates in April 2006. -- THOMSON REUTERS