UPDATE 2-Malaysia slashes rates to avert recession

(Adds rate cut)

By Varsha Tickoo

KUALA LUMPUR, Jan 21 (Reuters) - Malaysia's central bank on Wednesday slashed its key policy rate by a surprise 75 basis points to its lowest level in over 10 years, and is expected to cut rates further in a bid to stave off recession.

The bank cut its key overnight policy rate (OPR) MYINTR=ECI to 2.50 percent, and also cut its bank reserve requirement by 150 basis points to 2 percent in a move that it said was aimed at ensuring banks continued to lend money.

Analysts polled by Reuters had expected a 25 basis point cut. The surprise move on Wednesday prompted some economists to say that rates here could fall as low as 1.5 percent.

Malaysia's government is forecasting that economic growth this year will be 3.5 percent, a figure many private sector economists say is overly optimistic and the central bank recognised on Wednesday that the economy was more vulnerable.

"The sharper deterioration of the global economy is expected to have a greater impact on the Malaysian economy," it said.

(For a graphic on Malaysia's economic growth versus exports, please click here)

The central bank's announcement came after the government released data showing Malaysia's annual inflation MYCPI=ECI fell to 4.4 percent in December from 5.7 percent in November, mainly due to lower fuel prices.