Interest rate falls can recover the economy

16-May-2020 Intellasia | BizLIVE | 6:02 AM Print This Post

If inflation were well controlled in 2020, the government would have more room to carry out monetary and fiscal easing (prudently) to support economic growth to reach the prime minister’s expected target of over five percent. The interest rate cut starting on May 13 was indirectly estimated by an organisation in their newsletter earlier this month.

Inflation was emphasized, as Vietnam’s Consumer Price Index (CPI) had plummeted for three consecutive months, until April 2020. Ahead, high inflation in 2019 was also a favourable reference for this year’s control target.

However, the decision to lower the State Bank of Vietnam (SBV)’s operating interest rates simultaneously was a piece of good news, also a worried one.

Responding to BizLIVE, a member of the author of the above report, said this interest rate lowering represented a drastic view of SBV in its efforts to create favourable conditions to support the economy and businesses affected by Covid-19. This decision followed the monetary easing trend of most central banks in the world, and the opportunities of the financial market (both domestic and foreign) were doing well.

In a more specific analysis, in the overview, this was the solution towards supporting economic growth, supporting businesses, as well as reducing the pressure on credit institutions themselves in spending capital charge.

On the other hand, there was one more advantage. The decision to lower the operating rates would accelerate the monetary turnover faster. Accordingly, people and businesses had more positive conditions to push money out for trade or consumption. This also became more meaningful when the economy had just returned after a period of social separation, rediscovering the production and business so that it could gradually become normal.

However, there were other facts to be noticed in this decision to lower interest rates. Therefore, SBV had withdrawn the residual space that might be the last for this cut, said the expert.

Firstly, among the recently lowered interest rates, the ceiling of short-term dong deposit rates (less than six months) became quite sensitive. On the one hand, this interest rate ceiling continued to decrease, creating favourable conditions for reducing capital costs for credit institutions. Currently, the proportion of short-term deposits accounted for about 60 percent to 70 percent of total deposits at many commercial banks, so the cost reduction there was significant. However, the sensitive factor was related to an interest group of savings depositors. This point led to a fact shown since the beginning of the year that the capital mobilising growth rate of the whole system had expressed a very slow sign.

However, with the mechanism of ceiling interest rate only applied partially, for the terms of six months or more, credit institutions could discuss with depositors. This mechanism created conditions for balancing sources, as well as balancing the term structure of mobilised capital more sustainably.

Secondly, also related to the ceiling interest rate, another point in this reduction was the ceiling interest rate for short-term dong loans for priority areas from 5.5 percent to five percent per year.

The measure of the ultimate effect was how much credit growth the bank industry had. In other words, what were the loan dynamics there when the lending rate ceiling reduced, as well as the ability of businesses in those areas to reach it, the expert BizLIVE consulted stated. Perhaps, with a more open interest rate, companies would have more opportunities and favourable access conditions. That was a fact to be considered.

With the above views, after the decision to lower the operating rates this time, the cost of an economic component was minimised and supported, motivating, and overcoming difficulties caused by Covid-19. Besides, the room for monetary policy became narrow. There was a small likelihood that a further interest rate reduction could occur, with some of the sensitive limits mentioned above.

 

Category: Finance, Vietnam

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