Nov. 25 (Bloomberg) -- Malaysia’s central bank, which cut interest rates yesterday for the first time since 2003, may reduce borrowing costs further next quarter as risks to economic growth heighten, economists said.

The overnight policy rate, which was lowered to 3.25 percent from 3.5 percent, will probably fall to 2.75 percent by March, according to Aseambankers Malaysia Bhd., JPMorgan Chase & Co. and HSBC Holdings Plc. CIMB Investment Bank Bhd. expects a similar reduction by the end of 2009.

Central bank Governor Zeti Akhtar Aziz, who had held rates steady as Asian neighbors announced cuts last month, said today the full effects of the financial crisis that has triggered recessions from the U.S. to Japan may only be felt next year. Sustaining growth is the government’s main challenge, Second Finance Minister Nor Mohamed Yakcop said today in Kuala Lumpur.

“Bank Negara Malaysia’s focus has shifted decisively in favor of the growth outlook,” Matthew Hildebrandt, an economist at JPMorgan, wrote in a report dated yesterday. There’s a “risk of further cuts later in the year if the growth outlook deteriorates more than expected” in 2009.

A slump in the price of crude oil and palm oil, the nation’s largest agricultural exports, will put a strain on Southeast Asia’s third-largest economy, Nor said in a prepared speech today.

Currency Gains

Malaysia’s three-year bonds rose, pushing yields to the lowest level since May 2007, on speculation the central bank will keep cutting rates. The ringgit advanced 0.3 percent to 3.6215 against the U.S. dollar.

Malaysia’s central bank said in its monetary-policy statement late yesterday that “the global economic and the international financial conditions are expected to continue to remain volatile and uncertain.” The bank will “undertake the appropriate policy response to avoid a severe economic downturn,” it said.

Malaysian companies including Malayan Banking Bhd., the nation’s largest bank, Sime Darby Bhd., the world’s biggest palm-oil producer, and planter IOI Corp. have already said profit in their current financial years will fall.

The central bank will probably cut rates by a quarter of a percentage point at each of its January and February policy meetings, Tai Hui, an economist at Standard Chartered Plc, said in a report dated yesterday. Borrowing costs will probably stay on hold for the rest of next year, he said.

Asian Slowdown

Central banks from India to Australia have already lowered rates in recent weeks to spur growth as the U.S., Japan and the euro region slipped into recession. The International Monetary Fund said yesterday Asian economies may ease “substantially’‘ as the global slowdown erodes demand for their exports.

Malaysia’s government expects economic growth to slow to 3.5 percent next year from at least 5 percent in 2008.

That’s even after a 7 billion-ringgit ($1.9 billion) stimulus package that includes providing funds for homes, public transport and industry. The government also said it would let workers pay less into their pensions. Nor said today the measures would translate into 1.6 percentage points of gross- domestic-product growth.

To free up funds for lending, the central bank also cut the so-called Statutory Reserve Requirement, the amount of money commercial banks must set aside, to 3.5 percent from 4 percent. It was the first reduction in a decade.

To contact the reporters on this story: Angus Whitley in Kuala Lumpur at awhitley1@bloomberg.netStephanie Phang in Kuala Lumpur at sphang@bloomberg.net

Last Updated: November 25, 2008 00:48 EST