According to Finance Minister Datuk Seri Tengku Zafrul Abdul Aziz, the government has no intentions to peg the ringgit to the US dollar since such a move would be laden with high risks and a significant trade-off.
He said that a peg would be bad for the economy because it would force Malaysia to follow the monetary policies of the nation to which the ringgit is tied.
“For example, if the ringgit is pegged to the US dollar, Malaysia’s overnight policy rate would have to follow that of the US Fed, which will raise its interest rate by 325 basis points, or 3.25 percentage points overall, in 2022, despite Malaysia’s different levels of economic recovery and inflation.”
“Malaysia would face limitations in implementing monetary policy, and Malaysians would have to endure the high financing cost, notwithstanding the fact that our economic condition differs from that of the United States,” the finance minister said today in Dewan Negara.
He emphasised that the strength of a currency is determined by good economic fundamentals, stating that Malaysia has excellent fundamentals supported by robust domestic and international demand, as well as growing commodity prices.
This was reflected in a 5% increase in GDP in the first quarter, with a higher performance projected in the second quarter.
Tengku Zafrul stated that if the peg is imposed, capital restrictions will be required to prevent capital outflows, which will undermine foreign investor trust.
A flexible ringgit exchange rate is important to balance the need to absorb external shocks and support the Malaysian economy amid global uncertainty, he added.
“Hence, the government through Bank Negara Malaysia (BNM) will ensure that financial markets are stable and efficient and we will take proactive measures to ensure sufficient liquidity and resilience to prevent destabilisation in the ringgit’s value.
“Continued monitoring will be done by BNM to ensure an an orderly forex market and prevent volatile moves in the ringgit,” he said, adding that the central bank is ready to use policy instruments in the forex market to prevent volatility in the ringgit.
