At the current overnight policy rate (OPR) of 2%, economists believe that Malaysian interest rates could have hit bottom and a potential hike can be expected after the second half of next year.

Kenanga Investment Bank Bhd economist Wan Suhaimie Wan Mohd Saidie said improving business and consumer sentiment in the coming months was expected to result in higher demand and higher commodity prices, which would in turn lead to rising inflation.

"It will give a case for interest rate hike, possibly, after the second half of next year," Wan Suhaimie said, speaking to The Edge Financial Daily over telephone on whether lending rates were at the trough.

BNM had slashed the OPR by a combined 150 basis points since November last year, but has maintained it at 2% at its three previous Monetary Policy Committee meetings in April, May and July this year.

Wan Suhaimie said it could be counter productive if BNM decided to cut interest rates tomorrow as the country might need to preserve adequate room for its monetary initiatives in the event the economy later on took a turn for the worse amid an anaemic global economic landscape.

He said a reduction in lending rates could result in a larger a money base and fuel a rise in asset prices.

According to Maybank Investment Bank Bhd chief economist Suhaimi Ilias, a more accommodative monetary stance is expected to boost stockmarkets.

"The 'party' in asset prices is highly susceptible to central banks and monetary authorities taking away the proverbial punch bowl to restore sobriety via interest rate hikes, quantitative tightening and stricter rulings on lending.

"The biggest beneficiary from the resultant ample liquidity is the equity markets," Suhaimi wrote in a note.

Malaysia's inflation, measured by the consumer price index (CPI), declined by an annual pace of 2.4% last month, the second consecutive month of deflation after a yearly contraction of 1.4% in June. The CPI had fallen due to lower transport cost amid cheaper fuel.

While the threat of global inflation has subsided for now due to lower crude oil prices, investor sentiment indicates that consumer prices could rise next year. This will be spurred by government spending and debt, besides anticipation that lawmakers will print more money in a move known as quantitative easing.

Central banks in the US and UK, for example, have resorted to quantitative easing when low interest rates proved to be ineffective in boosting domestic demand. A larger supply of the US dollar and pound sterling will weaken both currencies.

As crude oil is transacted in the US dollar, a weakening greenback will push up the price of the hydrocarbon resource.

However, existing high jobless rates globally could stifle consumer demand, hence, curbing manufacturers' and traders' bargaining power to raise prices.

OSK Research Sdn Bhd head of research Chris Eng foresees BNM maintaining the OPR at 2% till 2010, taking into account the deflation outlook in Malaysia for the second half of 2009.

At the same time, world economic recovery is still deemed uncertain due to high unemployment rates in major economies.

"Any rate hike now will be premature given that the Malaysian economy is still at the nascent stage of recovery as the impact of the stimulus packages has yet to be felt.

"Therefore, we think that the interest rate should be left unchanged in the absence of more tangible global economic growth. We see the OPR being maintained next year in the absence of any major developments," Eng wrote in a note.

For now, the general view is that the country will likely register its first gross domestic product (GDP) contraction this year since the 1997/1998 Asian financial crisis.

This is in anticipation that GDP in the second and third quarters of 2009 will continue to shrink against the backdrop of a still-weak global platform.

BNM is scheduled to announce the second quarter GDP data tomorrow.

Malaysian policymakers have initiated two economic stimulus packages with a combined value of RM67 billion to boost domestic demand against a landscape of falling exports.

The nation's exports fell by a yearly pace of 22.6% to RM45.1 billion in June this year, the ninth consecutive month of decline, due to less demand for the country's electrical and electronic and palm oil-based products, besides petroleum.