The State Bank of Vietnam (SBV) will not raise the compulsory reserve ratio for bank deposits, said Nguyen Ngoc Bao, director of the SBV’s Monetary Policy Department in a recent talk with the Thoi Bao Kinh Te Vietnam newspaper. Excerpts:
There are different opinions about the central bank raising the compulsory reserve ratio on bank deposits. What can you say this?
It is absolutely true that there has been some speculation about the central bank raising the compulsory reserve ratio. However, it is only rumours. As for the SBV, as of this moment the governor and SBV’s departments have not yet considered raising the compulsory reserve ratio.
Inflation keeps increasing and some analysts say it is because of the high money supply and believe that raising the compulsory reserve ratio would be an effective way of curbing inflation quickly. What do you think?
It is true that inflation has been seeing some complex movements since the start of this year and the volume of money in circulation has increased significantly and the central bank had to ask the banks to increase the compulsory reserve ratio in order to rein it in.
In particular, the compulsory reserve ratio has been adjusted up from 5% to 10% for dong deposits of less that 12 months and from 2% to 4% for 12-24-month dong deposits, from 8% to 10% for less than 12 month US dollar deposits and from 2% to 4% for 12-24-month US dollar deposits. The central bank has also actively employed open market operations to withdraw cash from circulation. To date, the measures, which have been undertaken by the central bank, have shown their effectiveness. Therefore, there is no need to raise the compulsory reserve ratio any further. Additionally, the government has instructed the ministries and branches to undertake comprehensive measures to curb inflation.
According to the General Statistical Office, in August, the consumer price index (CPI) increased by 0.55% over the previous month and lower than the rise of 0.9% in July. This demonstrates the slowdown in inflation. From now until the year’s end, the central bank will continue using open market operations, issuing bonds to withdraw money from circulation, balancing the money supply in the early months of this year.
The central bank will prioritise the market-characterised measures and tools that can help both stabilise monetary policies and support economic growth. We forecast that inflation will increase more slowly towards the year’s end, while the central bank can still control total payment instruments. Some worried that the higher compulsory reserve ratio would make banking operations costs more, pushing up lending interest rates. However, in fact this did not happen since banks are in surplus of disposable income. Some banks have decided to lower their deposit interest rates and interest rates on the inter-bank market also tended to drop.
Do you mean that the central bank is taking the initiative in monetary policies?
Monetary policies must be implemented flexibly, depending on specific movements in the market. The main goal is to stabilise the monetary market and support economic development. All measures and tools to be used should aim for this. Abnormal signs in money supply, exchange rates and interest rates occurred in the first months of the year, however the problems have been basically dealt with.