UPDATE 1-Malaysia says has flexibility to tackle inflation

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PUTRAJAYA, May 8 (Reuters) - Malaysia has flexibility in its fight against inflation and slowing economic growth, a government minister said on Thursday.

Malaysian annual inflation hit a 13-month high of 2.8 percent in March, driven higher mainly by costlier food, but it remains one of Southeast Asia's lowest levels due to price controls on essential goods such as flour and cooking oil.

"The external environment, high commodity prices, rising crude oil prices, is creating this environment of anxiety ... many issues of affordability but certainly inflation," Second Finance Minister Nor Mohamed Yakcop told reporters in the Malaysian administrative capital of Putrajaya, near Kuala Lumpur.

Asked about government plans to fight imported inflation, Nor Mohamed said, "We have the flexibility to counter this challenge and overcome it. We don't have demand-pull inflation. Domestically, it is OK."

Malaysian government investment funds may sell down holdings in local banks, Nor Mohamed said.

"No problem in selling down at the right time, at the right price," he said.

The Employees Provident Fund sold a 25 percent stake in Malaysia's fourth-largest lender, RHB Capital (RHBC.KL: Quote, Profile, Research), to Abu Dhabi Commercial Bank ADCB.AD for $1.23 billion on Thursday.

The Fund has said it is looking to sell another 5 percent stake in the bank, but has not identified any potential purchasers.

Japan's Sumitomo Mitsui Banking Corp, a unit of Sumitomo Mitsui Financial Group Inc (8316.T: Quote, Profile, Research), is among those interested in the 5 percent stake, the Edge financial daily said. (Reporting by Jalil Hamid, writing by Niluksi Koswanage; Editing by Neil Fullick)