She said such a move comes with substantial risks and trade-offs.

“A flexible exchange rate buffers the economy from adverse effects from economic shocks and preserves Malaysia’s competitiveness under challenging global conditions,” she told the media during the central bank’s briefing on Malaysia’s first quarter GDP performance.

Nor Shamsiah said Malaysia would need to mirror the policy of the country it was pegged against. Should the economy raise its rate by 2%, she said, Malaysia would have to follow suit to maintain the peg and would lose its monetary policy independence.

In this hypothetical scenario, she said, Malaysians would have to bear with higher borrowing costs even though the economy was weaker than in the US.

“We would also have to resort to capital controls and all this would be necessary to ward off speculative pressures on the ringgit,” she said.

Former prime minister Dr Mahathir Mohamad had proposed on Wednesday for the ringgit to be pegged at RM3.80 to the US dollar like his administration did at the height of the Asian financial crisis of the late 1990s.

He said this in response to the current depreciation of the ringgit.

According to Nor Shamsiah, the success of the ringgit peg in 1998 was attributed to the capital controls the country had introduced, but she said it also came at a price.

“Maintaining a peg is a costly policy as it would also take up a sizeable amount of our reserves, especially during stress conditions. This ultimately would weaken our external resilience.”

She explained that a peg would have a detrimental effect on the country’s external sentiment affecting not only FDI coming into Malaysia but it will also exacerbate capital outflows from Malaysia.

“At BNM, we do not target any level of exchange rate but we are in the market to ensure there is no excessive volatility in the exchange rate and the conditions of the financial market continue to be orderly,” she said.