Monetary policy should be further eased for interest rate cooling

24-Mar-2016 Intellasia | Bao Dau Tu | 6:00 AM Print This Post

The interest rate level has not shown any sign of cooling. If interest rates continue to rise, the effort to recover the economy would be threatened. Many economic experts believed that the State Bank of Vietnam (SBV) should further loosen the monetary policy to save the interest rate situation.

The business community have expressed concerns when interest rates have continuously gone up since the early year. Experts in the research group at HSBC Vietnam and Vietcombank Securities Company (VCBS) both assessed that the interest rates may further increase by 50 points this year.

Director of the Business Development Institute (BDI) Dr Le Xuan Nghia gave warning that at the present time, if interest rates continue to rise, all the efforts to recover the economy and restructure banks, and the efforts of businesses to recover may not be achieved. Agreeing with Dr Nghia, former SBV’s Governor Le Duc Thuy said that the interest rate level is continuously rising and according to calculation, it may increase by one to two percent compared to 2015.

According to explanation of banks, the increase of deposit rates is due to many reasons, such as the risk of inflation re-rising, the pressure of dong devaluation, the lower growth rate of mobilisation against lending, and the draft amendment of Circular 36/2014/TT-NHNN which will further tighten the regulations on the ratio of using short term funds for medium and long-term lending, etc.

However, economic experts believed that the main reason is the government bond. The interest rate curve of the entire market depends on government bond yields. If the government bond yields go up, market interest rates cannot be lowered, said Dr Nghia.

Since the government bond yields are high and risk factor is zero, banks will actively purchase government bonds. However, it is noteworthy that investing in government bonds is not entirely secured. The Credit Default Swap ratio (CDS – which measures the risk of government bonds) of Vietnam is currently fairly high at 270 points and it sometimes hit 300 points in the past. Meanwhile, the government of Greece fell into insolvency when this ratio reached such level (300 points). The biggest corollary of interest rate increase is the return of confusion in businesses. If so, the determination to recover and production efforts, which have just been sprung up, will be affected.

Dr Nghia recommended that the monetary policy should be reasonably eased and there should be a strategic vision to stabilise interest rates and control exchange rate flexibly under a methodical way. According to Dr Nghia, the monetary policy can be loosened via lowering compulsory reserves, limiting the issuance of SBV’s bills for money withdrawal, and actively participating in interbank market to stabilise the interest rates on this market. In addition, the government needs to carry out drastic measures to reduce budget deficit, thereby lowering the mobilisation of government bonds. When easing monetary policy, the biggest challenge is the re-increase of inflation. However, if the capital flows are directed in the right direction, the economy will have more motivation to recover.

The good sign is that SBV is currently drafting the amendment of Circular 36. Accordingly, the draft mentioned the increase on the limit to use short-term funds for purchasing and investing in government bonds of foreign bank branches from 15 percent to 35 percent. This regulation will facilitate foreign banks to own more government bonds, thereby reducing the pressure for domestic banks, and the interest rates thus will be under less pressure.

 


Category: Finance, Vietnam

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