Since the beginning of this year, Central Bank SBV has released many changes in interest rate policy. Thoi Bao Kinh Te Sai Gon (Saigon Economic Times) Online had a talk with Paul Francis Gruenwald, chief economist from ANZ Group about the problems relating to monetary policies in Vietnam. Excerpts:
What do you think about the Vietnam’s monetary policies till this time?
We think that monetary policies in recent months were tightened up because the government’s interest rate subsidisation programme ended while lending rate was liberalised already. So, although the basic rate was unchanged, we see that the interest rates are still on increase, resulting in a slowdown in credit growth as well as economic growth. However, this will create two positive impacts in short term. Firstly, the increase trend of interest rates shows that inflation reached peak and inflation pressure will fall in coming time. Secondly, it seems that Vietnam’s trade deficit also has peaked and caused the pressures on forex rate. In our point, the foreign exchange market till this time has been more balanced compared with 2009.
What is your comment on SBV’s recent move of allowing interest rate liberalisation?
We think that is good because the lending rate has been adjusted under market movement instead of being ruled at less than 150 percent of basic rate. Current interest rate band can inflect the supply and demand of the monetary market rather than basic rates. Therefore, once the whole banking system amends interest rates in accordance to new benchmark, Vietnamese economy will be restored again in last months of 2010.
Yet, in the forthcoming time, Vietnam should continue adjusting the interest rate benchmark suitably, meaning that the deposit rates will be higher and more flexible against previously. This is a good solution for the economy but also a correction process. We have to wait how Vietnamese market reacts.
Government has requested SBV to slash the lending rate down to 12-13 percent pa while the 2010 inflation is curbed at less than 7 percent. What do you think about the co-implementation of both tasks at the same time?
Vietnam’s economy is growing more slowly, leading to the gradual decline in demand of borrowing loans and loan rates. This time macro-economic conditions, fiscal policies and forex rate policies must support the sustainable growth of economy. We, ANZ, think that Vietnam’s economic growth could reach 5-6 percent and the inflation target of 7 percent can be reached in this year.
Vietnam’s Q1 economic growth was lower than forecast and one more time we need to consider the reaction of enterprises against new interest rate band. Interest rate now is decided by the market, so SBV cannot intervene directly into loan rates any more.
Should Vietnam pay more attention to inflation target than economic growth target?
If being questioned like that one quarter earlier, I would answer “yes”. But, the Q1 economic situation showed that inflation would fall gradually. We have two ways to calculate inflation. First, according to traditional calculation method, inflation is still rising and standing at 9.5 percent right now. Second, basing on the increase impetus of inflation, inflation has peaked and will gradually go down, as for us, which will be the leading indicator for inflation in future. We believe that inflation is on decrease in Vietnam so 2010 inflation target of 7 percent can be reached.
Thus, Vietnam now should lean to instigate economic growth rather than inflation target because its Q1 economic growth was fairly low.