Malaysia's economy may grow slightly faster in 2006 fueled by the private sector, an independent think tank said today but it warned that interest rates may edge higher.

The Malaysian Institute of Economic Research (MIER) said it expects domestic product (GDP) growth for 2006 to be 5.5 percent, up from 5.3 percent last year.

MIER said it expects GDP growth for 2007 at 5.8 percent. Malaysia posted a growth of 7.1 percent in 2004, its fastest pace in four years.

Mohamed Ariff Abdul Kareem, MIER's executive director said public consumption was projected to expand by 2.4 percent this year and 2.8 percent in 2007 compared with 3.9 percent in 2005.

The slower growth was in line with government policy towards reducing deficit, he said.

Mohamed Ariff said private consumption would be moderate this year due to the recent fuel price hike amidst modest income gains.

"Private consumption is expected to grow 6.7 percent in 2006 (down) from 8.3 percent last year," he was quoted as saying by Bernama news agency.

Interest rates up

Foreign direct investments (FDIs) meanwhile were expected to rise moderately this year with private investment forecast to grow by 12.3 percent this year and 11.5 percent in 2007.

Foreign manufacturers invested RM17.9 billion (US$4.8 billion) in Malaysia last year, the highest since 2001.

Mohamed Ariff said the services sector would grow faster than other sectors in near term.

Inflation were projected to edge up to 3.7 percent in 2006 and 3.3 percent next year compared with three percent last year, partly due to hike in fuel prices and increased transport cost, he said.

Mohamed Ariff said interest rates would rise further.

"Our interest rates are still low in real terms and there is room for further hikes," he added.

Driven by private sector

Malaysia's central bank last month raised its key interest rates for the second time in three months amid inflationary pressures, raising the overnight policy rate (OPR) by 25 basis points to 3.25 percent.

The OPR is the main interest rate which banks use to benchmark their own lending rate, which is based on supply and demand.

Inflation was 3.0 percent for 2005, peaking at a six-year high of 3.7 percent in August, compared with 1.4 percent for 2004.

Wan Suhaimi, economist with AmSecurities told AFP that its local brokerage house also predicts GDP growth for 2006 to be 5.5 percent.

"Growth will be driven by the private sector," he said.

But Wan Suhaimi said oil price rises would slow expansion.

Malaysians in February woke up to the country's biggest ever fuel price hike, the latest in a series of increases aimed at curbing the cost of subsidies.