KUALA LUMPUR - Malaysia's export-dependent economy will shrink more than officially forecast and the central bank still has room to cut interest rates, a top economic think tank said on Wednesday.

Malaysia's gross domestic product will shrink 2.2 per cent this year, more than the government and central bank expect, said Malaysian Institute of Economic Research (MIER). It earlier forecast economic growth of 1.3 per cent for 2009.

'In light of the deep declines in macro indicators, the gloomy business and consumer confidence, and the dismal sectoral indices, we are obliged to revise Malaysia's growth forecast for 2009 downwards,' MIER said in a report.

'If exports shrink severely, the downturn could be more harmful.'

MIER said the central bank had room to cut interest rates to 1.5 per cent or lower, down from 2 per cent at present, to buoy the economy.

Bank Negara Malaysia Governor Zeti Akhtar Aziz, however, told reporters that monetary policy had already been substantially eased.

'We have already taken an aggressive stance (on interest rate policy) now the focus is to ensure lending continues. So far banks have been extending loans and loan growth is at a pace that (is) supportive of growth,' Zeti told reporters.

The central bank next meets on April 29 to discuss monetary policy. Analysts are divided over whether the central bank would continue cutting rates after slashing them by a total of 150 basis points in its last three meetings, with some predicting it to hold fire at the end of the month.

Zeti reiterated the central bank's gross domestic product forecast range of 1 per cent contraction to 1 per cent growth for this year, the same as the government's forecast, although most private forecasters expect the economy to shrink much more.

'What we are seeing now is the external sector experiencing a contraction but the domestic economy is still growing and this (is) what we need to sustain,' Zeti said.

Malaysia, Southeast Asia's third-biggest economy and one of the most geared to exports, saw its gross domestic product grow just 0.1 per cent in the fourth quarter from a year ago, as exports plunged due to sagging global demand.

However, the country's economy should bounce back and grow 3.3 per cent in 2010 as the global economy recovers, think tank MIER said, although this forecast was lower than its earlier projection of 3.8 per cent growth for next year.

MIER also said the impact of Malaysia's second stimulus package is "less certain" than a conventional fiscal injection as it consists mainly of guarantees that would primarily encourage banks to lend more.

Malaysia last month announced a massive 60 billion ringgit ($25 billion) spending package spread over this year and next.

But this includes just about 15 billion ringgit in actual spending with the rest being guarantees, MIER said.