Recent moves by the State Bank of Vietnam (SBV), according to Nguyen Duc Khuong, meant more coordinating capital flows than monetary easing.
When the world central banks simultaneously lowered interest rates to boost economic growth, from the middle of September, SBV reduced the operating interest rates and took some measures to lower interest rates in the interbank market (market two). Some examples were lowering the interest rate on the open market operation (OMO) by 0.75 percent a year, reducing the treasury bill interest rate from three percent to 2.75%, loosening the credit room for some banks.
Prior to this series of policies, many suggested that this might be a move that the operator would loosen monetary policy.
Commenting to VnExpress, Nguyen Duc Khuong, Professor of Finance at Paris Academy of Administration and Business Administration (IPAG Business School), said that the monetary easing policy was considered to support the economic growth slowdown or stagnation. Meanwhile, SBV was operating in the context of allowable monetary policy space, stable economy with breakthrough opportunities. Therefore, according to him, the recent operations were meant to coordinate vital capital flows, flexibly responding to the needs of the economy.
Even in 2020, when the global economy showed many difficulties, Vietnam still had the potential for development. Khuong said that when opportunities were open, businesses would need financial resources. This might also be the reason why SBV extended credit for consumption and investment, through lowering interest rates, thereby meeting the capital demand of the economy.
He cited indicators showing Vietnam’s macroeconomic stability and good progress. Inflation was at three percent to 3.5 percent (lower than the government’s target). Public debt gradually decreased (public debt to Gross Domestic ProductGDP fell from 58.4 percent in 2018 to 56.1%). Budget revenue and expenditure were balanced and guaranteed at both central and local levels. These were important indicators that showed proper government management of spending. Vietnam’s GDP growth was also at the top of the region and the world.
The coordination of capital flows was even more necessary when, in early November, the prime minister required the use of monetary policy instruments to reduce at least 0.5 percentage points of lending interest rates by the beginning of 2020, especially in priority areas.
Khuong said that this policy would be very beneficial to the economy if credit growth was directed to crucial investment areas, small and medium enterprises. This orientation was also reflected by SBV’s tightening of real estate credit and the promulgation of policies under this goal, such as support for priority areas.
Regarding the impact on interest rates in the market, Joint Stock Commercial Bank for Investment and Development of Vietnam (BIDV) Research and Training Institute assessed that after SBV lowered the operating interest rates and took measures to reduce interest rates in the interbank market, there was still no sign of a decrease mobilising rate when interest rates on market one (loans for individuals and businesses) and market two remained high. Therefore, the regulation of lowering the ceiling interest rate for short-term deposits in mid-November was the next measure to narrow the interest rate gap between the two markets, thereby creating conditions for reducing lending rates.
Decreasing interest rates at the end of the year was rare in Vietnam because this was the peak period for capital and cash needs. The recent reduction of banks’ interest rates was likely not in the previous plan but to carry out the policy of reducing interest rates of the government, SBV, according to the report of BIDV Research and Training Institute.
As estimated by BIDV Research and Training Institute, the average interest rate of the whole market for less than six-month terms decreased by about 0.3 percent per year compared to the rate before the ceiling interest reduction. The ceiling cap did not affect the deposit rates of state-owned banks much, but helped to narrow the interest rate gap between this group and joint-stock banks.
