Malaysia's central bank governor and his deputy have walked out after clashing with Prime Minister Mahathir Mohamad over his new monetary ideas. Bank Negara governor Ahmad Mohamad Don and his deputy Fong Weng Phak tendered letters of resignation earlier this week, effective from September 1. Dr Mahathir was expected to seek replacements more supportive of his plans to progressively hack back interest rates to stimulate the country's battered economy, which this week officially went into recession. The central bank has been told to cut interest rates three times in a fortnight against its wishes. There is mounting speculation it may soon be ordered to impose capital controls. The departure of Mr Ahmad and Mr Fong is seen as a big blow to Finance Minister Anwar Ibrahim, who had backed the central bank in recent months over mounting policy differences with the prime minister. Standard & Poor's MMS International analyst Sani Hamid said: 'This will be seen as a further weakening of Mr Anwar's stand and will be read negatively by the markets.' Reuters yesterday quoted unnamed government officials and bankers who attended a central bank briefing on Thursday saying Mr Ahmad and Mr Fong could not stand the interference any more. 'The last straw was pending capital controls. They just didn't want to be around to sign an order imposing capital controls,' one banker said. Officials said assistant central bank governor Zeti Akhtar Aziz would become acting governor from Tuesday. Ms Zeti is one of four associate governors at the Malaysian central bank. At a news conference on Thursday, she said the economy was expected to improve in the second half of this year after falling into recession in the first. 'If the external environment remains unchanged, we expect an improvement in GDP [gross domestic product] in the second half,' she said. 'Of course, it also depends on external developments in Hong Kong, China, Japan and the rest of the global economies.' Ms Zeti also said Malaysia could not rely on an export-led recovery. 'While it is an important element, we have to revive domestic demand,' she said. Special Functions Minister Daim Zainuddin, a close ally of Dr Mahathir, told a business conference in Kuala Lumpur on Thursday that capital controls would not happen. However, rumours that they may be imminent were rife in the market. Dr Mahathir has now twice commented that he was drawing up new 'shocking' and 'extraordinary' economic policies. The ringgit has already shed more than 40 per cent of its value in the past year and Malaysia's economy is in sharp decline. Dr Mahathir wants to reflate the economy by slashing back interest rates, which he hopes will ease companies' domestic debt burdens and help stimulate spending. Economists said the problem with such a strategy was that there might be a flight of capital which would further weaken the ringgit, hence the need to curb outflows. Dr Mahathir has not named a replacement but there has been market talk that Hassan Merican, a former governor now with state oil firm Petronas, would be the prime minister's favoured candidate. Mr Hassan is seen as a close ally of Dr Mahathir.