“Inflation risks are on the upside, but growth risks are on the downside,” Gov. Zeti Akhtar Aziz said in an interview with Reuters at an Islamic banking conference in Luxembourg.

“There is a risk of higher inflation. This is a global phenomenon where you have higher commodity and energy prices that are translating into higher food and fuel prices.”

“This is something we monitor closely. Right now our assessment is that it is still within the range that we have forecast, which is in the band of 2.5 to 3.5 percent,” she said.

Asked whether Malaysia’s policymakers considered raising the bank’s inflation forecasts at its last meeting, she said: “Not at this stage. Although the risks were there, there was not enough information to do so now.”

Malaysia’s Bank Negara raised benchmark interest rates to 3 percent in April from 2.75 percent. Analysts see policy being tightened by a further 25 to 50 basis points in the second half of this year.

“Recently we raised our interest rate to 3 percent, but at 3 percent we still see it as very supportive of growth,” Zeti said.

On the outlook for growth, Zeti said the bank had not altered its view that GDP will rise by between 5 and 6 percent annually for the next “few years.”

The economic impact on Malaysia of Japan’s March earthquake and tsunami was expected to be limited she said, while the effect of Middle East tensions would be negligible.

Those combined with elevated energy and commodity prices and the risk from the ongoing euro zone debt crisis on the global economy, however, meant the current situation was particularly hard to predict.

Malaysia is due to announce a semi-overhaul of its banking system in the next few weeks, which is expected to see the government relax rules on foreign stakes in its nine banks and award up to two licenses for so-called $1 billion dollar Islamic ‘mega-banks’.

Zeti said the new super institutions could come about in three ways: by investors building them from scratch, existing Shariah-compliant banks merging or Islamic subsidiaries of larger banks being beefed up by partnership deals.

Asked when the plans were expected to be finalized and whether the recent tensions in the middle had pushed back a likely start date, she said this year was still a realistic expectation.

“By the end of this year? This is something that we look for that to happen.”

On the plans to loosen the rules of bank ownership, she appeared to suggest recent indications from Malaysia’s prime minister that ownership could be lifted to as high as 49 percent from the current 30 percent ceiling, may be accurate.

“The majority ownership of our local banks will always remain as domestic because we want to achieve balanced growth,” she said when asked about Prime Minister Najib Razak’s comment.

“Should we allow beyond 30 percent then there will be very transparent criteria for cases that would be allowed to be above (30 percent).”

Analysts expect the criteria to be designed to prevent private equity, hedge funds and other parts of the alternative banking world taking greater control in Malaysia.

Zeti said the rules would demand that new investors bring “stability and something value-added.”

She also indicated the kind of geographical DNA Malaysia was looking to attract.

“We want to prepare ourselves for greater integration with the Asian region and the rest of the world, in particular the Middle East and Europe,” she said, pointing to recent licenses given to French bank BNP Paribas and banks from Abu Dhabi and Indonesia.