Ringgit pegging comes with substantial risks - BNM

KUALA LUMPUR – Ringgit pegging is not in the best interest for Malaysia, Bank Negara Malaysia (BNM) Governor Tan Sri Nor Shamsiah Mohd Yunus stated.

She explained that there will be significant risks to pegging the ringgit such as having to mimic the monetary policy of the country which is being pegged against.

Furthermore, sustaining a peg is an expensive strategy because of using up large amounts of reserves particularly in the last decade. She added that this is going to weaken Malaysia’s external resilience.

According to BNM’s governor, pegging the ringgit will lead to negative consequences on investor sentiment. This would impact both the foreign direct investment into Malaysia, as well as capital outflows from Malaysia.

During the recent announcement of Malaysia’s first quarter (Q1 2022) gross domestic product (GDP) performance, she stated that BNM does not target specific exchange rate levels and will ensure there is no undue volatility in the exchange rate and financial market conditions.

“We must acknowledge that the main factor that allowed us to successfully track the ringgit in 1998 was the capital controls that was introduced during then,” she added.

In regards to the weakening of local currency, Nor Shamsiah responded that it was primarily due to foreign factors and the fact that US growth is strong, as well as rising inflation.

“In addition to that, there are many uncertainties in the world’s economy that includes the Russia-Ukraine conflict and prolonged lockdown in China,” she added.

Furthermore, the Volatility Index (VIX) has consistently risen and this resulted in a stronger US dollar, but other countries were seen as depreciating against the dollar.

“The ringgit’s movement is in line with that of other regional countries, and again I would like to emphasis that having a flexible exchange rate is most appropriate under current conditions,” she continued.

Nor Shamsiah also stated that the amount of onshore foreign exchange trading in the domestic market has been strong. The volatility in the domestic onshore market is still quite close to the daily volatility rate.

The flexible exchange rate had cushion the economy while preserving Malaysia’s global competitiveness, she added.

BNM has recorded that the ringgit depreciated by 0.7% against the US dollar in Q1 2022 and a further dip of 4.7% was recorder as at May 11 this year. The central bank said it is in line with the movement of other currencies in the region.

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