How a rate band differs from a peg, and what the authority owes at each edge

A band is a peg with edges instead of a single number. The authority publishes a central parity and a permitted distance either side of it, leaves the rate alone in between, and is expected to act only when one of the two limits is reached. The Maldives replaced a single administered rate with an arrangement of exactly that shape in 2011.

Key Takeaways

• A point peg names one rate. A band names a central parity, a width, and two edges.
• The Maldives Monetary Authority allowed the rufiyaa to move within 20 per cent either side of its existing central parity in 2011, without moving the parity.
• The obligation lives at the edges. Inside the band the authority does not have to act at all.
• The two edges are defended with different resources, so only one of them can be exhausted.
• A band describes what is permitted. It does not promise that the rate will use the room.

What does a band publish that a single number does not?

A point peg publishes one thing, which is the rate. A band publishes three: a central parity, a width, and the two edges.

The width carries the meaning. It states how much movement the authority is willing to live with before it is expected to step in. A narrow band is a peg with an allowance for daily noise; a wide band concedes real flexibility while keeping a named anchor in place.

The International Monetary Fund draws the line between the two by width. A conventional pegged arrangement is one the country has formally adopted, confirmed by the rate staying within margins of less than one per cent either side of a central rate for at least six months. A band is classified as such where the margins are at least one per cent either side, or where the gap between the highest and lowest value exceeds two per cent. In both cases the central rate is public, or notified to the Fund.

So the difference is not the strength of the promise. It is where the promise applies.

Why would an authority move from a single number to a band?

Usually because the single number has become expensive to hold.

The Maldives Monetary Authority sets out its own history plainly. The rufiyaa had run through a fixed peg, a basket peg, a floating period and a return to a fixed rate before the last revision was made in 2011. The Authority describes the position at that point as one of persistent excess demand for United States dollars, downward pressure on international reserves, and a fixed exchange rate that was significantly overvalued. The response was a horizontal band, within which the rufiyaa was allowed to fluctuate by 20 per cent either side of the central parity.

Notice what was not changed. The parity stayed where it was and the anchor was not abandoned; what changed was how far the market could move away from it.

A devaluation moves the parity and is a statement about what the currency is worth. Widening a band leaves the parity alone and is a statement about how much the authority intends to intervene, after which the market may do the rest. Fund staff writing on the Maldives the following year recorded that the currency depreciated by almost 20 per cent after the band was introduced.

Who is allowed to make that decision?

A band raises this question and a currency board does not; the Maldives answers it in statute.

Under the Maldives Monetary Authority Act 1981, the principal purposes of the Authority include issuing currency and regulating the availability and international value of the rufiyaa. But the Act separates that standing role from the act of setting the external value. Section 13 provides that the President of the Republic, in consultation with the Board, may decide an external value for the rufiyaa, having regard to the Maldives' obligations under any international monetary agreement. Notices of any change in the external value are then published by the Authority on the President's instructions.

The level is a decision, taken by a named office and published when it is taken, rather than a mechanism running on its own.

What does the authority owe at each edge?

Inside the band, nothing. Movement is not evidence that anything has gone wrong, because permitted movement is the design.

At the edges the position reverses, and the two edges are not symmetrical.

At the edge where the local currency is weakest, more buyers want foreign currency than sellers are offering. To hold the line the authority sells foreign currency and takes local currency in. It is paying out of reserves, and reserves are finite.

At the edge where the local currency is strongest, the flow runs the other way. The authority buys foreign currency and pays with domestic money it issues itself. There is no natural limit to that, although it has consequences for the domestic money supply and eventually for prices.

The two edges look alike on a diagram and behave differently. Bands that fail almost always fail at the weak edge, because only one of the two defences can run out.

How is that different from a currency board?

By the kind of promise involved.

In the Fund's own description of a conventional pegged arrangement, the authorities stand ready to maintain the parity by intervening, directly or indirectly, but there is no commitment to keep it irrevocably. A band inherits that character: the edges are levels at which the authority is expected to act, and the expectation is strong, but it is not an obligation that must be honoured on demand.

A currency board is the other thing. It publishes a commitment it must honour whenever a bank asks, and the correction follows whether or not anyone in authority wants it that morning. How a currency board defends a peg sets that mechanism out. The published levels can look identical on a page. What sits behind them does not.

Where does a band stop and a float begin?

A float publishes no edge at all. In the Fund's definition a floating rate is largely market determined, with no ascertainable or predictable path, and policies that target a specific level of the exchange rate are incompatible with floating. An authority in a floating market may still buy or sell its own currency, but it is choosing to, usually to calm disorderly trading rather than to hold a level.

A published edge tells everyone precisely where the authority has committed itself. A float generates no such information at all. Set side by side:

What happens when the rate settles on one edge?

It stops behaving like a band, whatever the rulebook says.

The Maldives Monetary Authority is direct about this in its own account. Because of the limited availability of United States dollars in the domestic market, excess demand pushed the rate to the upper end of the horizontal band, where it has remained virtually fixed.

The Fund's classification system was rebuilt to deal with exactly that gap. Countries are classified in line with their declared arrangement where observed outcomes confirm it, and where they do not, staff assign a separate classification based on behaviour. One of those behavioural categories is the stabilized arrangement, which applies where the spot rate stays within a margin of two per cent for six months or more as a result of official action, and which, in the Fund's own words, does not imply a policy commitment by the authorities.

A band is a statement about what is permitted. It is not a promise that the room will be used.

What a band cannot fix

A band changes where a constraint binds. It does not remove the constraint.

If demand for foreign currency exceeds what the market and the authority together can supply, the pressure has to go somewhere. Widening a band gives it room to appear in the traded rate. If the rate then reaches the weak edge and stays there, the pressure reappears in other forms: waiting at banks, informal allocation, or a parallel market outside the official one.

An exchange rate arrangement decides who feels a shortage of foreign currency, and in what form. It never ends one.

Three questions to ask about any band

Three questions settle what any band actually is. Who sets the parity: some are legislated, some set by a central bank board, some, as in the Maldives, decided by the head of state on advice. Whether the defence is an obligation or an expectation, a standing undertaking to deal at the edge being much stronger than a stated readiness to intervene. And where the rate has actually sat, since a rate moving inside its band is priced by a market while one resting on an edge for years is administered.

Where to look next

The AUD to MVR page carries the live reference rate and a short block on what kind of money the rufiyaa is. For the case where a country anchors to a neighbour's currency and takes that neighbour's monetary stance with it, what it means to import another country's monetary policy covers what is traded away.

Sources

• Maldives Monetary Authority, Evolution of Monetary Policy in the Maldives - the regime sequence, the 2011 band of 20 per cent either side of the parity, the conditions that prompted it, and the rate sitting at its upper end
• Maldives Monetary Authority Act 1981 - section 4 on the Authority's principal purposes, and section 13 on the President deciding an external value in consultation with the Board
• International Monetary Fund, Revised System for the Classification of Exchange Rate Arrangements, Working Paper WP/09/211 - the definitions and margin thresholds for a conventional peg, a horizontal band, a stabilized arrangement and a float, and classification both as declared and as it behaves
• International Monetary Fund, Exchange Rate Pass Through to Prices in Maldives, Working Paper WP/12/126 - the depreciation of almost 20 per cent after the band was introduced in April 2011

General information about how exchange rate bands work. Not financial advice, and not a recommendation of any product or institution. Reviewed by the Tradergy editorial team, September 2026.