In recent short time, the State Bank of Vietnam (SBV) had consistently made policy moves related to monetary and banking. Specifically, following the decrease of 0.25 percentage points of some executive interest rates in September, SBV in October decided to cut the ceiling interest rates for both deposits and loans to credit institutions. In the middle of this month, SBV lowered 0.5 percentage points of the open market operation (OMO) interest rate. On December 2, SBV issued interest rate decisions for compulsory reserve deposits and deposits in excess of mandatory reserves of credit institutions in the direction of significant reduction (decreasing by 0, 4 percentage points compared to the level issued in July, which was 1.2 percent for compulsory deposits in dong of credit institutions at SBV).
About the continuous moves of the authority, a financial expert, Phan Minh Ngoc, shared some opinions to better understand the goals that SBV was aiming.
Many people believed that the dynamics of monetary policy by SBV last time were to support the banks and lower interest rates in the economy according to the new direction released by the prime minister.
According to Ngoc, the reality was not completely simple like that. Because the SBV’s recent moves actually did not have the same purpose. Therefore, it was not easy to properly understand the actions of the SBV, and perhaps even SBV themselves could hardly explain clearly about their movements.
Ngoc elaborated more on each of the recent moves by SBV as the following.
The lowering of the operating rate to 0.25 percentage points, in principle, was a loose monetary move. However, such rate cut was too small (based on the basis interest of five percent to seven percent), especially compared to the relative reductions in regional countries which was also 0,25 percent but on a fairly low interest rate level of two to three percent. That was not to mention whether SBV was willing to provide capital with such low interest rates to credit institutions or not, which was not clearly shown.
Thus, as previously analysed, this operating rate reduction of SBV was only symbolic. It was hard to say that the monetary policy in Vietnam had been relaxed. Accordingly, it was also hard to say that SBV had positively supported the commercial banking system by lowering this interest rate, unless, in the future, SBV would continue to make similar moves.
About SBV lowering interest rates on OMO, the 0.5 percentage point reduction was significant, which was, in fact, the most substantial decrease in the past five years and the second decrease this year. However, when noted that this channel had been inactive for nearly three months earlier, lowering OMO interest rates seemed to be only temporary in order to support the liquidity of the system in each period of time, and not necessarily a part of a series of consistent action towards the goal of reducing interest rates and supporting the commercial banking system.
The nature of lowering the deposit and lending interest rate ceiling for credit institutions was utterly different from the above actions. More specifically, lowering the interest rate ceiling was primarily an administrative measure that SBV had applied to the commercial banking system, thereby (hopefully) reducing the interest rate level in the economy, while SBV did not have to loosen monetary policy to lower interest rates as their major function. In other words, commercial banks had to manage and balance themselves so that they could retain customers’ deposits with lower deposit rates while cutting lending rates with several subjects and types. Thus, even to say that the reduction of deposit and lending interest rate ceiling had and would put many difficulties for credit institutions.
The lowering of the interest rate on compulsory reserve and exceeding compulsory reserve deposits had the same effect as lowering the deposit and lending interest rate ceiling in the sense that it would make it more difficult, rather than making it easier for credit institutions.
By the way, that action of SBV was entirely different from the monetary easing action through the reduction of the required reserve ratio. There seemed to be great confusion, equating the lowering of repaying interest rates on compulsory reserve deposits of credit institutions at SBV with the SBV lowering the proportion of mandatory reserve deposits applicable to credit institutions.
When SBV reduced the interest rate applicable to the reserve deposits and the one exceeding the compulsory reserves of credit institutions, it meant that the credit institution would receive less than the interest for the same amount of its required reserve deposits at SBV. In other words, this was similar to the SBV’s tightening of monetary policy, reducing the amount of money supply to the economy. With the reduction of 0.4 percentage points on the interest rate of 1.2%, this fiscal tightening by SBV was considered very significant.
In Ngoc’s opinion, what was the continuous and robust series of policy actions of SBV?
In a series of recent policy actions of SBV, what could be concluded was that SBV was still operating its monetary policy loyal to its motto which was to be cautious, particularly tightening more than loosening so as not to trigger inflation, cause weakening exchange rates; be flexible, as they would relax a bit and temporarily when tightening monetary policy caused tension excessive in liquidity; and be synchronised when using multiple interest rates, and exchange rates.
