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 was 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 would 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 its monetary policy and Malaysians would have to bear high financing costs although the economic situation here is different from that of the US,” he told Dewan Negara.

He said the strength of a currency depended on strong economic fundamentals, noting that Malaysia had solid fundamentals that were supported by strong demand domestically and overseas, as well as rising commodity prices.

This was reflected in first quarter gross domestic product growth of 5%, with better performance expected in the second quarter.

Tengku Zafrul said if the peg was 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 was important to balance the need to absorb external shocks and support the Malaysian economy amid global uncertainties, he said.

“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 orderly forex market and prevent volatile moves in the ringgit,” he said, adding that the central bank was ready to use policy instruments in the forex market to prevent volatility in the ringgit.