Soft Peg

Soft peg is a monetary policy in which a country’s currency is fixed or maintained within a certain range against another currency. The objective of a soft peg is to keep the value of the country’s currency stable and limit exchange rate fluctuations.

The soft peg policy is typically implemented through intervention by the central bank in the foreign exchange market. The central bank engages in buying and selling foreign currencies to meet fluctuations in demand for the local currency, thereby keeping exchange rate fluctuations under control.

The soft peg policy is often preferred when there are excessive fluctuations in exchange rates. This policy can enhance the competitiveness of exporters and improve the balance of trade. Additionally, it can increase foreign investors’ confidence in the country and encourage capital inflows.

However, there are also risks associated with the soft peg policy. Firstly, the sustainability of this policy may be problematic when the central bank’s intervention in the foreign exchange market is limited by available resources. Furthermore, fixing exchange rates can restrict the flexibility of the country’s monetary policy and reduce its resilience against economic shocks.

In conclusion, a soft peg policy is a monetary policy used to fix or maintain a country’s currency within a certain range. It can limit exchange rate fluctuations and improve the balance of trade, but it also carries risks such as sustainability and reduced economic flexibility.