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Flexible exchange rate crucial, say economists

PETALING JAYA: Economists concur with the government’s view that the ringgit should not be pegged to the US dollar, and a flexible ringgit exchange rate is important.

Malaysia University of Science and Technology economics professor Geoffrey Williams told StarBiz that a ringgit to US dollar peg should not be the government’s policy.

“Governments and central banks cannot control exchange rates. Exchange rate targeting in the past everywhere in the world has been at best ineffective, at worst a disaster.

“Exchange rates are determined by the market in all circumstances in the short and long term.

Malaysia University of Science and Technology (MUST) economics professor Geoffrey Williams

“In most cases, they are determined by factors outside the control of monetary authorities such as economic conditions in other countries,” he noted.

Yesterday, Bernama reported Finance Minister Tengku Datuk Seri Zafrul Abdul Aziz as saying the government has no plans for a ringgit-US dollar peg, as such a move is fraught with high risks and a large trade-off.




Tengku Zafrul explained that 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 (OPR) would have to follow that of the US Federal Reserve, which is expected to raise its interest rates 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,” Tengku Zafrul told the Dewan Negara.

He 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, Tengku Zafrul added.

Williams pointed out that at best, monetary agencies might influence exchange rates on an ad hoc basis, but they have no systematic influence on the level or volatility of exchange rates.

“Bank Negara is no different to that. Raising the OPR will be wholly ineffective in strengthening the ringgit and the central bank has made it clear that this is not their policy. They are wholly correct in that and I support that stance,” he said.

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