KUALA LUMPUR: If the ringgit is pegged, Malaysia will face constraints in setting its monetary policy and the public will have to bear high financing costs, Finance Minister Tengku Datuk Seri Zafrul Tengku Abdul Aziz said.
He said that to do so, currency peg measures needed to be complemented by capital control measures to prevent capital outflows.
"This action will affect the confidence of foreign investors towards Malaysia," he said in a statement today.
"If the ringgit is pegged, Malaysia will face constraints in setting (its) monetary policy and the people will have to bear high financing costs even though our country's economic situation is not the same as in the United States."
Describing the idea as "risky", Tengku Zafrul said pegging the currency at the moment would be counterproductive given that the country is not in a financial or economic crisis.
"At this time, the government, through Bank Negara Malaysia (BNM), does not plan to peg the ringgit to the US dollar because that move has a large risk and trade-off.
"If the peg is implemented, Malaysia needs to fully follow the monetary policy of the country whose currency is the 'reference' or basis for the ringgit peg."
He said that although the ringgit had declined by 8.7 per cent against the greenback since early this year, other currencies were also suffering the same fate.
He added that this occurred due to the aggressive increase in interest rates by the US Federal Reserve cumulatively by 225 basis points as of Sept 20, 2022.
Tengku Zafrul said the US interest rates were expected to rise further between 75 and 100 basis points by Sept 21 to curb inflation in the US, which continues to rise.
"Higher returns on US dollar-denominated assets will generate higher demand for those assets among global investors.
"This has undermined sentiment in the market and among investors, who subsequently act to reorganise their investment portfolios in safe-haven assets and financial instruments in US dollar.
"It is certain that most world currencies will continue to weaken against the US dollar as a result of this situation."
He said the current flexible ringgit exchange rate was an important policy as this could balance the need to absorb external shocks to support domestic economic activity, despite the present financial market condition and the uncertain global economic growth rate.