Malaysia will not peg its currency to the US dollar, says minister

by FAYYADH JAAFAR / pic TMR FILE

THE government will not peg the ringgit against the US dollar as the move has a lot of risks and trade-offs.

Finance Minister Tengku Datuk Seri Zafrul Abdul Aziz (picture) said that Malaysia will maintain a flexible exchange rate regime in order to support the country’s economic growth.

The minister was responding to a question from Kota Baru MP, Nasir Hashim, during the Dewan Negara session today.

He explained that the decision to peg the ringgit against the US dollar would require Malaysia to fully follow the monetary policy of the country whose currency is the reference or basis for the ringgit peg.

“For example, if the ringgit is pegged to the US dollar and if the Federal Reserve’s interest rate increases by 325 basis points (3.25%), overall, then the Overnight Policy Rate will also need to be increased at the same rate even though Malaysia is at an advanced stage of economic recovery and there are different inflationary pressures from the US,” he said.

“In this regard, Malaysia will face constraints in setting its monetary policy and the people will have to bear high financing costs even though the economic situation of our country is not the same as in the US.

“If the mooring measures are implemented, they need to be equipped with capital control measures to prevent capital outflows. However, this action will affect the confidence of foreign investors towards Malaysia.”

He explained that a flexible ringgit exchange rate is currently an important policy to balance the need to absorb external shocks with the importance of supporting domestic economic activity, despite the financial market conditions and the uncertain global economic growth rate.

“Accordingly, the government, through Bank Negara Malaysia (BNM), will always ensure a stable and smooth financial market situation and take proactive measures to ensure sufficient liquidity and a resilient and deep market to prevent instability of the ringgit,” he added.

Continuous monitoring is also carried out by BNM to ensure an orderly situation in the foreign exchange market and avoid significant fluctuations in the ringgit exchange rate.

In this regard, the government will continue to manage domestic and external development risks, and BNM is also prepared to use its operational policy instruments to ensure orderly conditions in the foreign exchange market to avoid significant fluctuations in the ringgit exchange rate.

He also stressed that the strength of a country’s currency also depends on strong economic fundamentals.

“Basically, the country’s economy remains on a solid track, supported by robust domestic and external demand and rising global commodity prices.

“All this has been reflected by the country’s GDP in the first quarter of this year, which increased by 5%, and is expected to grow even better in the second quarter,” he concluded.

At the moment, ringgit stands at RM4.545 against USD$1.