Fearing demand for funds will fuel an interest rate bubble, the State Bank of Vietnam (SBV) has said it will continue injecting more funds into the economy through the open market.
In a report released last week, the central bank said that it pumped in about VND52 trillion ($3.2 billion) in the first half of the year, buying up securities. The figure represented a whopping 171 per cent year-on-year increase.
The bank also bought mature paper worth VND51 trillion from domestic commercial banks to improve the banks’ liquidity positions, and provided credit institutions, the State Treasury and other financial organisations with around $1.6 billion for mopping up in bonds and other paper in the period.
However, the pressure on interest rates remained high as deposit growth was slow while demand for credit remained high, the report said, citing that deposits increased by just 9 per cent while growth in outstanding loans reached almost 11 per cent.
As Vietnam Investment Review reported in the previous issue (#718), funds are moving into most local banks, both joint stock and state-run commercial firms, at a slower tempo, putting them under pressure to hike their rates.
Central bank officials also predicted that domestic banks are likely to continue raising interest rates for Vietnamese dong savings for the rest of the year, one of the reasons being the stagnancy in capital mobilisation.
Analysts, meanwhile, said they were seriously concerned that high interest rates would hit manufacturing, weakening the competitiveness of the economy.
The country’s economy is in great need of capital to help it reach its targeted annual growth rate of 8.5 per cent. To obtain this goal, according to the central bank, Vietnam must achieve a credit growth rate of over 25 per cent.
Local commercial banks have also been under pressure to raise their interest rates since the consumer price index (CPI) hit a high alert level.
CPI, the basis for computing inflation, climbed 5.2 per cent in the first half of the year, and the government hopes to cap it at 6.5 per cent for the whole year.
The SBV is working on measures to prevent a price hike in the second half of this year in order to keep the whole year’s inflation rate within the targeted level.
By doing so, the central bank will strive to maintain the credit growth rate at 25 per cent to meet economic development targets, while ensuring macro-economic stability, SBV Governor Le Duc Thuy said.
Thuy explained that currency movements only had a minor impact on CPI compared to other factors like drought, bird flu or the sharply increasing import prices.
While tightening monetary policy might not serve to curb inflation, it would surely hit economic growth, he said.
Normally, to control inflation, the State Bank uses several measures to tighten monetary policy, like raising interest rates to mop up excess money in the economy – a measure applied in the 1980s to restrain hyper-
However, the situation is different now. A more open economy requires a more flexible monetary policy. Measures applied in the past year to control inflation, like increasing the statutory reserve, discount rates and interest rates, have not achieved the results that were expected.
The central bank has, in recent years, employed a flexible monetary policy which has had a positive impact on stabilising the gold market and foreign exchange rates to meet the demands of the economy.
The work of controlling inflation and ensuring economic growth is considered to be as specific for Vietnam’s banking sector as it is for other countries.
Following the implementation of the latest measures, the SBV said it will ask commercial banks to focus on improving the quality of their loans. Only highly feasible projects should be provided with commercial loans, with priority given to small- and medium-sized projects and household-based business proposals.