Malaysia's economy is likely to grow at a better-than-expected 5.6 percent this year on the back of lower inflation, said an influential think tank, revising its figures for 2007.

The Malaysian Institute of Economic Research (MIER) said it was also upgrading its forecast from an earlier 5.2 percent on the implementation of a 54-billion-dollar five-year development plan, the Bernama news agency reported.

Other factors fueling growth were the relaxation of foreign exchange trading rules and the scrapping of the real property gains tax, said MIER executive director Mohamed Ariff, while noting the forecast was still lower than the government's projection of 6.0 percent.

Mohamed Ariff also said the ringgit would continue to strengthen and was likely to hit 3.35 to the greenback if offshore trading on the local unit was allowed.

The central Bank Negara is expected to allow trading of the ringgit offshore before end of this year, he said.

"If this does not materialise, the local unit will still appreciate, but to a lower level of 3.40 per US dollar, as it is still undervalued and does not reflect the strong economic fundamentals," he was quoted as saying.

Malaysia removed its 3.80 peg to the US dollar in July 2005, replacing it with a managed float against a basket of currencies.

On Monday, the ringgit hit near 10-year highs against the dollar at 3.43.

Despite the strengthening of the currency, Malaysia's central bank said last month the country would maintain a ban on trading the ringgit offshore.