KUALA LUMPUR, May 19 (Bernama) -- Bank Negara Malaysia Governor Tan Sri Dr Zeti Akhtar Aziz says inflation will remain modest this year and the process of rate normalisation will be dynamic.

"Right now, we don't have any treat of inflation. Inflation will remain modest this year although it will rise.

"What we want to do is to make sure that the strong growth that we have experienced so far will be continued and will be sustainable," she told reporters after the signing of a memorandum of understanding (MoU) between Bank Negara and the Australian Treasury here Wednesday.

She said the process of normalisation would be a dynamic one because if there was any slowing down, the rate normalisation would take a pause. "But in a period of very strong growth, there is potential room to normalise further," she said.

She said the monetary policy on interest rates remained supportive to promote growth.

Malaysia's economy grew 10.1 percent in the first quarter of 2010. The overnight policy rate was raised on May 13 by 25 basis points to 2.50 per cent towards further normalisation of monetary conditions.

Zeti said the central bank expected the local economic situation to improve further despite the uncertainties coming out from Europe.

She stressed that local financial institutions had limited exposure to the debts crisis in Europe.

"We believe that action will be taken and has been taken and this will contain the development and address the issues that have evolved. This is very important so that it doesn't have spillover effects," she said.

The MoU signed today aims to foster long-term strategic business development in conventional and Islamic finance between Malaysia and Australia, focusing on several key areas such as enhancing mutual co-operation on capacity building and human capital development in the financial services industry, and the exchange of information and experience in the legal, regulatory and supervisory frameworks.

It also seeks to facilitate and promote the development of an effective and conducive financial market infrastructure, and enhance cross-border financial activities including research on Shariah matters in Islamic finance products and services to promote consistent application for cross-border transactions.

The signing of the MoU follows an agreement by trade ministers of both countries -- Datuk Seri Mustapa Mohamed and Simon Crean -- to explore cooperation on Islamic finance during the August 2009 Malaysia-Australia bilateral trade talks.

-- BERNAMA