The annual inflation rate as measured by the consumer price index (CPI) stood at 5.8 per cent in July, the Statistics Department said at the weekend.

That was below the 6.2 per cent year-on-year rate in June and under many economists' projections.

``This may provide an excuse, if you like, to cut interest rates further,'' said senior regional economist Simon Flint at markets consultancy IDEA.

The central bank, Bank Negara, has cut the benchmark three-month intervention rate twice since July, from 11 per cent to 10.5 per cent on July 31 and to 10 per cent on August 10.

Earlier this year, Bank Negara said the 1998 inflation rate was expected to be between seven and eight per cent, up sharply from 2.7 per cent last year.

A 40 per cent fall in the value of the ringgit currency against the US dollar since July 1997 has driven up theprice of imported goods.

But with the economy in a tailspin, pressure on prices appears to be less severe than authorities had feared, giving the central bank, which had long stood by high interest rates to keep inflation in check, room to ease monetary policy.

Over the first seven months of the year, the CPI rose 5.2 per cent compared with the same period in 1997.

Many economists now expect the annual inflation rate to range between five and six per cent in 1998, fully two percentage points below the central bank's projection.

``An inflation of seven to eight per cent would justify an interest rate of around 11 per cent,'' Flint of IDEA. said.

``But if inflation averages one to two per cent lower than forecast, then that justifies a cut in interest rates accordingly,'' said Flint.

Government economists said signs point to subdued inflationary pressures. With the economy in contraction, there is little pressure on wages and domestic demand is slack.

Gross domestic product (GDP) shrank 1.8 percent year-on-year in the first quarter. Government officials concur with economists that it contracted sharply in the second quarter, meaning the economy was officially in recession.

The second quarter GDP figure is due out by the end of August.

Economists said although the government seemed keen to bring down interest rates, it had to be wary of undermining the ringgit.

``If speculators think interest rates are going down, they'll attack the currency,'' said, head of regional economic research Neil Saker at SocGen-Crosby Research.

``If rates come down too fast, there will be no reason why depositors would want to keep the ringgit,'' he said.

The monetary easing marks a break from the tight monetary and fiscal policies that were pursued earlier this year.

The International Monetary Fund recommended that Malaysia raise rates to prevent overheating and defend the ringgit -- advice which Kuala Lumpur forcefully rejected.

Now government economists say the inflation and growth indicators, as well asshare prices being at 10-year lows, vindicate the shift towards easing.

Finance minister Anwar Ibrahim reiterated on Saturday that Malaysia would map its own strategy and not turn to the IMF.

``We are responsible for ensuring that the economic policy we implement is the one wanted by our people,'' he said.