A crawling peg exchange rate system is a hybrid approach that blends elements of fixed and flexible exchange rate regimes. In this system, a country’s currency is pegged to another major currency, such as the U.S. dollar, but the pegged rate is adjusted gradually over time. These small and regular changes, known as “crawls”, are typically made in response to differences in inflation rates, trade balances, or other economic indicators.

The main idea behind a crawling peg is to allow a currency to adjust in a controlled manner, avoiding the sudden shocks that can occur under a fixed system while still providing greater stability than a free-floating rate. Governments or central banks set the pace of adjustment, which may be either pre-announced or determined as economic conditions evolve.

This approach helps maintain competitiveness in exports, reduce inflationary pressures, and minimise currency speculation. However, it requires careful management and sufficient foreign exchange reserves to support interventions when needed.

Countries such as Chile and Colombia have used crawling pegs at various times to stabilise their economies during periods of inflation or rapid change. While effective in moderating volatility, a poorly managed crawling peg can lead to distortions if the adjustments do not reflect real market conditions or if investors lose confidence in the central bank’s commitment to its policy.