In a surprise move late on Monday, Bank Negara Malaysia reduced its key overnight policy rate - used by banks to set lending rates - by a quarter point to 3.25 per cent. It was the first time since 2003 that the central bank had cut the policy rate.

In a statement, CIMB said its banking arms will also cut their base lending rates by a quarter point to 6.5 per cent from Dec 1.

'This full passthrough of Bank Negara's (rate) reduction will help existing borrowers and also potential borrowers to contend with an environment of sharply moderating economic growth,' said CIMB Group Chief Executive Nazir Razak.

He said CIMB's Islamic banking arm would soon introduce Islamic financing packages which offer lower rates compared to conventional loans.

More banks are expected to follow CIMB's suit in cutting lending rates, which will stimulate spending and help boost the economy, analysts said.

Apart from cutting policy rate, Bank Negara for the first time in a decade also lowered bank's reserve requirements to 3.5 per cent from 4 per cent - which will release more funds into the financial system.

Bank Negara's rate cut is in line with its regional peers, and highlighted growing threat to economic growth. The government expects 2009 growth to drop to 3.5 per cent, from 5 per cent this year. But some private economists have warned of a possible recession and expect Bank Negara to further cut its overnight policy rate in the next few months. -- AP