The target zone is a band within which the currency would be allowed to float and it is usually considered to be that range within which the currency was at its 'correct' level. Although it undoubtedly allows greater flexibility than, for example, Thailand's single-rated peg, that the zone allows market forces to work only within a limited range, it is often treated as a cousin of fixed exchange rates. Since the increase in the supply of ringgit more or less matched that in demand, the exchange rate remained stable. In a forthcoming article, we will put forward the case why stable money-growth is essential for economic stability. Indeed, conscious of the potential dangers, Bank Negara sought to 'neutralise' the expansions by resorting to sterilisation.
Sterilisation involves issuing debt securities to the banking sector in exchange for cash.
The effect of this would be to deprive the banks of liquidity and hence curtail their ability to create new credit. Thus, in this manner money-supply growth might yet be contained. However, the effectiveness of sterilisation has long been a moot point. In 1994, Bank Negara's stock of sterilisation debt was gradually liquidated. Liquidating sterilisation debt however creates high-powered money and artificially lowers interest rates.