Anwar, who is also finance minister, said the business community wanted lower interest rates to spur growth, but a cut in the cost of money could undermine the ringgit, stoke inflation and jeopardise the financial system.

The central bank, Bank Negara, announced on Saturday that the gross domestic product (GDP) shrank by 1.8 per cent in the first three months of 1998 compared with the same period last year. It was the first quarterly contraction since Malaysia's last recession in 1985.

Bank Negara said on Saturday that it would reassess the economic outlook at mid-year.

"Our projection is still 2.5 per cent for this year. We don't need to revise that for now," Anwar told reporters in the capital. Anwar said the economy expanded in January and February before contracting in March. It thenpicked up again in April, he said. "You can't take the first quarter out of context. It was partly over-reaction and partly shock after the crisis. Things are settled now," he said.

The deputy prime minister was peppered with questions about interest rates.

Prime minister Mahathir Mohamad said last week that high rates were strangling the economy, and the government's top economic adviser, Daim Zainuddin, said stagflation -- weak economic growth coupled with inflation --loomed.

Anwar said the central bank had the option to lower interest rates, but high offshore rates for ringgit deposits must be taken into account in setting interest rates or the financial system could be put at risk.

Some banks outside of Malaysia have been offering short-term interest rates for the ringgit which are substantially above rates inside the country. The average three-month Kuala Lumpur Interbank Offered Rate was 11.03 per cent on Monday. "It's very important that people who talk about interest rates know the offshorerates for ringgit," Anwar said. "If you do not take this into consideration, you are putting the entire financial system at risk because what is stopping people from bringing out our funds?"

Anwar was asked if interest rates should be lowered. "The option must be kept open through the central bank," he said, adding that a rate cut "will affect adversely the currency and inflation."

He said Bank Negara would be issuing a detailed explanation on interest rates later on Monday. This year Bank Negara's three-month intervention rate has risen to 11 per cent from 8.7 per cent at the end of 1997.

Anwar said Bank Negara would determine its rates based on the value of the currency, inflation and taking into consideration the high offshore ringgit rates.

Asked to comment on Mahathir's remarks last week calling for lower rates, Anwar said the view reflected a consensus in the business community that rates are too high.