A hard peg and a soft peg are both exchange rate systems used by governments and central banks to manage the value of their currencies, but they differ significantly in terms of flexibility and control.

A hard peg is a strict commitment to maintain a fixed exchange rate against another currency or a basket of currencies. Under this system, the central bank must hold sufficient foreign exchange reserves and actively intervene in the market whenever necessary to keep the exchange rate unchanged. In some cases, countries even adopt another country's currency, a practice known as dollarisation. Hard pegs provide strong exchange rate stability and can help reduce inflation and increase investor confidence. However, they also limit a country's ability to conduct independent monetary policy.

A soft peg, on the other hand, allows a currency to fluctuate within a predetermined range around a target exchange rate. The central bank may intervene when the currency moves too far from the desired level, but it does not maintain a completely fixed rate. This approach offers greater flexibility and allows policymakers to respond more effectively to changing economic conditions.

The main difference between the two systems is the degree of exchange rate flexibility. A hard peg prioritises stability and predictability, while a soft peg balances stability with some freedom for market forces to influence the currency's value. Each system has advantages and disadvantages, and the choice often depends on a country's economic goals, financial stability, and ability to manage exchange rate pressures. Ultimately, both aim to support economic growth and maintain confidence in the national currency.