Bank Negara rules out pegging the ringgit

Pegging the ringgit is not in Malaysia’s best interest as it would have substantial risks, including mirroring the monetary policy of the country that the local currency is pegged against, Bank Negara Malaysia (BNM) governor Nor Shamsiah Mohd Yunus said today.

She said maintaining a peg would be a very costly policy as this had taken up a sizeable amount of reserves, especially in the last decade, adding that this would ultimately weaken Malaysia’s external resilience.

“A peg would have detrimental effects on investors’ sentiment, not only affecting foreign direct investment into Malaysia but also leading to capital outflows from Malaysia,” she told reporters after announcing Malaysia’s gross domestic product performance for the first quarter (Q1) of 2022 in Kuala Lumpur.

She said BNM does not target any level of exchange rate and will ensure that there is no excessive volatility in the exchange rate and conditions in the financial market.

“We have to acknowledge that the key factor contributing to our ability to successfully track the ringgit in 1998 was the capital controls introduced back then,” she said.

On the weakening of the local note, she said this was largely driven by external factors including strong growth and rising inflation in the US.

“On top of that, we have a lot of uncertainties in the global economy, including the ongoing conflict in Ukraine and uncertainty in China due to the lockdown,” she said.

She said the volatility index had also gone up at a constant rate, resulting in a stronger US dollar, while currencies in other countries were depreciating against the greenback.

“Movement in the ringgit is in line with other regional countries and again, I would like to stress, having a flexible exchange rate is most appropriate given the current circumstances,” she said.

Nor Shamsiah said the onshore foreign exchange trading volume in the local market had been healthy and the volatility in the domestic onshore market had not been very far from the daily volatility rate.

She added that the flexible exchange rate had buffered the economy and preserved Malaysia’s competitiveness under the global conditions.

According to the BNM, the local note depreciated by 0.7% against the US dollar in Q1 of 2022 and 4.7% as of May 11, broadly in line with the movement of regional currencies.