Tengku Zafrul says no need to peg ringgit to US dollar, strong economic fundamentals will support currency's value

KUALA LUMPUR: The government has no plans to peg the ringgit to the US dollar as such a move is fraught with high risks and a large trade-off, said Finance Minister Tengku Datuk Seri Zafrul Tengku Abdul Aziz.

He said a peg would not be the best move for the economy as it would require Malaysia to follow the monetary policy of the country to which the ringgit is pegged to.

"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, although Malaysia's economic recovery and inflation levels are different than that of the US.

"Malaysia would face constraints in setting the monetary policy and Malaysians would have to bear the high financing cost although the economic situation here is different from that of the United States," the finance minister told Dewan Negara today.

He stressed that the strength of a currency depends on strong economic fundamentals, noting that Malaysia has solid fundamentals, supported by strong demand domestically and overseas, as well as rising commodity prices.

This was reflected in first quarter gross domestic product (GDP) growth of 5 per cent, with an expected better performance in the second quarter.

Tengku Zafrul said if the peg is implemented, it would have to be accompanied by capital controls to prevent capital outflows, and that would affect foreign investor confidence.

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.

-- BERNAMA