Mahathir is sticking to a growth forecast this year of 4.5 percent.
KUALA LUMPUR, Malaysia (Reuters) -- Malaysia has cut interest rates for the first time in nearly two years as part of a package to boost its economy, hit hard in its export and tourism sectors by the Iraq war and SARS.
Prime Minister Mahathir Mohamad said the central Bank Negara's lending intervention rate was cut 50 basis points to 4.5 percent on Wednesday.
"It's a huge surprise to do so at this juncture having said recently local rates were adequate," Singapore-based Song Seng Wun, regional economist at GK Goh Research said.
"It seems that Mahathir may be a lot more worried than he suggested," Song added.
Mahathir, who is also finance minister, stuck by the central bank's forecast of 4.5 percent growth in GDP this year. Growth last year was 4.2 percent.
Many economists believe the government is being optimistic.
Mahathir announced plans for a direct fiscal boost of 2.5 billion ringgit ($658 million), resulting from a 1.7 billion ringgit increase in central government spending and an 800 million ringgit reduction in tax revenues.
The impact of the package will be greatly increased by a 5.6 billion ringgit loan fund to be made available by the Bank Negara Malaysia and development funds for entrepreneurs, hotels, food and other businesses.
Other items included a cut in mandatory Employees Provident Fund contributions to nine percent from 11 percent and a half-month salary bonus for government employees.
The package also contained measures to help the hotel industry weather a sharp drop in visitors following the outbreak of SARS, even though Malaysia has got off relatively lightly with just two deaths and a handful of probable cases reported.