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Easing interest rates – impossible mission for now?
Easing interest rates set by the government proves to be an impossible mission in the current context. Moreover, with the recent moves to tighten monetary policies to fight inflation, it seems that the task of reducing interest rates has been put aside.
Interest rates on the rise
Before Tet holiday, the State Bank of Vietnam said that if the consumer price index CPI increased by no more than 1.4 percent in February, it would slash the prime interest rate. However, the CPI increase in February has been forecasted to reach two percent. This means that the hope for interest rate reductions in first quarter of 2011 has vanished.
People have every reason to worry about the possible interest rate increases. After the decision to adjust the dong/dollar exchange rate, the electricity and petroleum prices are also going to rise, which are believed to make prices of other goods and services increase. Cao Sy Kiem, Member of the National Advisory Council for Monetary Policies has warned that it would be much more difficult to curb inflation in 2011 than in 2010, and even more difficult than in 2008. His words can be understood that the targeted inflation rate at seven percent may be unreachable.
In principle, interest rates can be eased only when the inflation rate goes down. Therefore, in the current circumstances, when the prices are sharply increasing, it is impossible to ease interest rates.
Curbing inflation, not easing interest rates, is the top priority for the government at the moment. The government has decided that the credit growth rate in 2011 must be limited at below 20 percent. If so, this would be the lowest credit growth rate in the last five years. The State Bank of Vietnam has also sent messages that it will tighten monetary policies.
The central bank’s Governor Nguyen Van Giau also said that when the inflation rate is overly high, the first thing that needs to be done is the government must apply measures to reduce the total demand in the national economy. This can be done by raising interest rates in order to withdraw cash from circulation and restrain the credit growth.
Right after the announcements were made, on February 17, the State Bank of Vietnam released the decision to raise the refinancing interest rate to 11 percent. Besides, the bank has also informed that it will reduce the money supply by about 100 trillion dong.
The current situation has recalled the scenario in 2008. At that time, the inflation rate was so high that the State Bank of Vietnam had to raise some kinds of basic interest rates in order to withdraw cash from circulation.
How will businesses live?
Bui Kien Thanh, a well known economist in Vietnam, has expressed his worry about the rising interest rates. He said that no economy can develop if the interest rates are as high as 19-20 percent, and no business would earn the profit high enough to cover such high interest rates.
Currently, the State Bank of Vietnam is asking commercial banks set up the deposit interest rates at no more than 14 percent per annum. However, banks have been trying to “dodge the laws” to offer higher interest rates in order to attract deposits. The highest actual deposit interest rate climbed to 17 percent. Meanwhile, the lending interest rate is now at 20 percent on average. Especially, some businesses have reported that they have to borrow money at interest rates of 23-25 percent per annum.
As a result, many enterprises have decided not to expand business at this moment and cancel their investment projects. Others simply “sit idle” because they well understand that the more they produce, the bigger losses they will suffer.
Kiem has warned that if the interest rate in 2011 stays at 20 percent per annum, production will shrink, which will lead to unemployment and reduction of exports. “This will be very dangerous,” he said, stressing that it is necessary to ease interest rates immediately. However, in order to ease interest rates, it is necessary to ease the inflation rate first.
Minh Son
vietnamnet
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