Malaysia's economy expanded at an annual rate of 7.1 percent in the first quarter of 2008, and faces only a modest slowdown later in the year.

Bank Negara also announced an easing of foreign exchange rules, in a move it said would boost Malaysia's competitiveness by making it easier to gain access to finance and reducing the cost of doing business.

The strong outcome for the three months to March compared to 5.5 percent growth in the previous corresponding period, and 7.3 percent in the fourth quarter of last year. The economy grew 6.3 percent in 2007.

Bank Negara said expansion was broad-based across all sectors, including agriculture which hit 6.3 percent compared with 3.8 percent in the first quarter of last year.

"Generally our forecast for the year of 5-6 percent growth remains," said central bank governor Zeti Akhtar Aziz, adding that growth was fuelled by high commodity prices and civil service pay rises.

"The global economy is expected to moderate in the second half of this year... and while the Asian region has done well in this first quarter, including Malaysia, we are likely to be affected," she told a press conference.

"However our assessment is that the underlying strength of our economy is likely to support growth in the second half of the year," she said. "Therefore, while slowdown or moderation is expected, it is expected to be modest."

The government has said it is confident that economic growth for 2008 will hit six percent despite troubles in key trading partner the United States.

Ban on offshore trading of ringgit stays

Zeti said the liberalisation of the foreign exchange rules, which covers a number of measures including removing limits on ringgit lending to foreign entities by local companies, individuals and banks, would provide a boost.

"This liberalisation is part of the continuous effort to enhance Malaysia's competitiveness by facilitating greater access to financing, and reducing the cost of doing business," she said.

However, the central banker reiterated that Malaysia was not ready to abandon its 10-year ban on offshore trading of the ringgit, the last vestige of capital controls introduced during the 1997 financial crisis.

"Certainly not in the near term, we do not plan to internationalise our currency," she said.

"In terms of timing, it would need very stable overall international financial market conditions before any major move or change is made in our system."

Bank Negara said inflation averaged 2.6 percent in the first quarter of 2008, a modest rate compared to its regional neighbours, as the impact of rising prices has been cushioned by extensive subsidies.

However, the central bank has predicted that rising prices of fuel, commodities and food will see headline inflation for the year rise to 2.5-3.0 percent from 2.0 percent in 2007.