Malaysia's central bank needs to strike a fine balance between maintaining economic growth and interest rate hikes, economists said amid expectations of further rises.
They said taming inflation was not the pressing issue in Malaysia as faced by central banks world-wide but rather to maintain economic growth and ensure any capital outflows are kept to a minimum.
Wan Suhaimi, an economist with K and N Kenanga Bhd told AFP that the government should be careful when pushing interest rates up.
"The government should be cautious when raising rates. It needs to ensure growth and stability in the financial market," he said. "Of course ensuring better growth should be the priority."
Suhaimi said inflation was not the main problem.
"If the government increases rates, it is to stabilise capital outflows and support the ringgit which is relatively undervalued," he added.
Malaysia's central bank's monetary policy committee is scheduled to meet on July 28 to decide on interest rates, and analysts said rates would probably go up by another 25 basis points for the fourth consecutive time.
Inflation eased to 3.9 percent in May from a year earlier after striking 4.6 percent in April and 4.8 percent in March, the highest level in six years.
Malaysia's central bank in April raised its key interest rates by 25 basis points to 3.50 percent in a bid to combat rising inflation following steep fuel price hikes.
The central bank had previously raised rates in February by 25 basis points to 3.25 percent and by 30 basis points to 3.0 percent last November, in what was the first hike in seven years.
Mohamed Ariff, executive director of the Malaysian Institute of Economic Research, an independent think-tank group, said monetary tightening at this juncture would cause domestic demand to decline.
"Tighter monetary policy is not necessarily the answer. For one thing, higher interest rates are likely to worsen cost-push inflation, as they add to the costs which in turn are passed on to the consumers.
"A tighter monetary policy is good for price stability but bad for economic growth," he said in an article warning "Don't be in a rush to raise interest rates," published in the New Straits Times newspaper.
Hardeep Singh, an economist with Bank of Tokyo-Mitsubishi UF-J Malaysia Bhd said the government would raise rates in August by about 25 basis points to make sure the gap was not too wide with US dollar interest rates.
"Or else it will increase the risk of capital outflow," he said.
Malaysia is aiming for an economic growth of 6.0 percent this year which the government says will be achieved after an expansion of 5.3 percent in the three months to March showed the country's economy was on a solid footing.
But Hardeep said since the 18 percent fuel hike in February and a subsequent electricity tariff hike, consumers sentiment had taken a beating and the higher electricity costs are expected to feed into June inflation figures.
"Sentiments and business confidence are both down now. If there is a further rate rise, consumers will cut spending and this may hurt growth," he warned.