The Bank of Thailand yesterday signed a memorandum of understanding (MoU) with Bank Negara Malaysia on settlement cooperation and investment, a move aimed at reducing risk from foreign exchange volatility.
The MoU is the first bilateral currency exchange pact within the 10-nation Asean bloc. Thailand's financial institutions will be allowed to determine foreign exchange rates between the baht and ringgit, and Malaysian banks can do the same.
Signed in Kuala Lumpur, the arrangement will "reduce the risks of exposure to the volatility of global settlement currencies and also lower transaction costs for businesses", according to a joint statement released by the two central banks.
The goal is to use local currencies as trade payments instead of the US dollar and avoid currency fluctuation when converting local currencies to the greenback.
The MoU signifies efforts initiated by the two central banks to encourage the use of the ringgit and the baht in the private sector, the statement said.
Malaysia is Thailand's biggest trade partner in Southeast Asia. Thailand had a trade surplus of US$18.5 million with Malaysia in 2014, according to Bank of Thailand data.
Malaysia is Thailand's fourth-largest trade partner globally, with bilateral trade value of $11.3 billion in the first six months of this year and $25.5 billion for all of last year.
"This bilateral arrangement marks an important milestone in supporting our commitment to promote the use of local currencies for trade and investment settlement among our Asean community," said Bank of Thailand governor Prasarn Trairatvorakul.
"I believe this will further strengthen cooperation as well as boost economic and investment development in the region."
Mr Prasarn said in July that the Thai central bank was negotiating with its Malaysian counterpart on direct exchange between the baht and the ringgit as a boost to trade and investment.
"The establishment of this framework will pave the way for greater financial and economic integration in the Asean region," said Bank Negara Malaysia governor Zeti Akhtar Aziz.