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It’s time to loosen monetary policy
For the first time in many months, an economist, Associate Prof Dr Tran Hoang Ngan, Dean of the Banking Faculty under HCM City Economics University, member of the National Advisory Council for Monetary Policies, has called for the loosening of the monetary policy.
In an interview with the local press, Ngan stressed that it is now the right time for banks to pump capital into businesses to help them push up production and business.
Giving the right to determine interest rates
Ngan thinks that the State Bank has made the right move by deciding to remove the ceiling interest rate scheme. The move has helped create healthy competition among banks. Banks raised deposit interest rates after the central bank set up the basic interest rate of 12%, which ensures a positive real interest rate.
The central bank caused big changes in the interest rate mechanism by raising the basic interest rate from 8.75% to 12% (375 points), re-financing interest rate from 7.5% to 12%, and re-discount interest rate from 6% to 11%.
Some people have said that the sharp increases of interest rates might shock the market. However, Ngan does not think that the sharp increases will greatly influence the national economy, since the basic interest rate has been kept at low levels for many years.
“The current monetary policy management being applied by the State Bank of Vietnam resembles the mechanism applied by other central banks in the world,” Ngan said.
Explaining this, he said that in other countries in the world, central banks manage the monetary policies based on ‘basic inflation’, i.e. the consumer price index (CPI) minus the price increases of critical products like food and foodstuffs, or petroleum. The US, Japan, UK, Germany, Singapore and Thailand all are regulating monetary policies based on basic inflation.
Recently, prestigious financial institutions like HSBC and Goldman Sachs have released very optimistic indices about Vietnam’s basic inflation. The institutions say that the figures are 11-12%, not high.
Reducing required compulsory reserve ratio for deposits
According to Ngan, the CPI of April was 21.42%, and the prices of food and foodstuffs contributed more than 10% to the increase, which means that Vietnam’s basic inflation rate was only just over 11%.
“We have no more reason to keep tightening the monetary policies if the basic inflation is 11%, and the interest rate is 12% already,” Ngan said, saying that the thing Vietnam needs to do now is to loosen the monetary policies, so that businesses can access bank loans, push up production, which can help stabilise the national economy.
Ngan believes that the best solution now is to lower the compulsory reserve ratio from 11% to 8-9% and consider compulsory reserve as loans the central bank lends to commercial banks. If the compulsory reserve ratio is lowered, banks will be able to lower lending interest rates.
The State Bank should not limit the credit growth rate at 30%, but should raise the capped rate to 35-40%, while different credit growth rates should be set for different banks. The credit growth rate was 54% for 2007, and it would stagger banks if it was sharply reduced to 30%.
When asked if a loosened monetary policy would lead to higher inflation, Ngan said that only the ineffective use of money causes high inflation. The high inflation in Vietnam is attributable to many factors, including ineffective public investment, ineffective business performance of state owned general corporations and enterprises.
VNN
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