Upstream monetary policy to support the economy


Monetary policy in Vietnam has implemented the necessary “upstream” measutres to support the economy. Photo: Internet

Going against the “hawkish” policy

Pandemic hits and political tensions among many developed countries expose the world economy to the risk of recession, causing monetary authorities of central major global economies to come up with “hawkish” economic policies. This policy is basically understood as an economic policy in favor of raising interest rates to fight inflation. The hawkish policy is less concerned with economic growth than the recessionary pressure caused by the high inflation rate.

For example, in the US, the US Federal Reserve (FED) has continuously raised interest rates and the latest in March 2023 was the 9th time since March 2022. The reference interest rate in the US is currently around 4.75 – 5%, the highest level since September 2007. Similarly, the European Central Bank (ECB) has also raised interest rates 6 times since July 2022 to curb inflation, currently, key interest rates range from 3 to 3.75%, the highest since the end of 2008.

However, by March and into April 2023, a series of bad developments from banks in the US and Europe raised concerns about the global economic outlook and escalating recession risks. Therefore, the major central banks have begun to signal the slowing down of interest rate hikes, and the FED has also given a less “hawkish” message on monetary policy, leaving the door open for another interest rate hike.

In such a context, the State Bank of Vietnam (SBV) quickly announced two cuts in operating interest rates in the second half of March 2023. In addition, the SBV also flexibly operated open market operations, reducing the interest rate offered to buy valuable papers to ensure abundant liquidity, and lowering mobile interbank interest rates. As a result, currently, according to Mr. Pham Chi Quang, Director of the Monetary Policy Department (SBV), the newly arising lending interest rate for the economy has decreased by 0.6% compared to the end of 2022 and is maintained downtrend in the near future.

Stabilize the variables

During a working session on April 25 with ministries and sectors on interest rates, bonds and the real estate market, Prime Minister Pham Minh Chinh directed that credit institutions should be guided on reducing both deposit and lending interest rates, ensuring balance and harmony between exchange rates and interest rates, between interest rates and inflation, increasing access to capital and absorbing capital of people and businesses. At the same time, the Prime Minister requested to continue to implement more proactive, flexible and timely monetary, fiscal and other policies.

Along with inflation, exchange rates and interest rates are always two big variables impacting the task of managing monetary policy. In 2022, the strong increase in exchange rates and interest rates has significantly affected market liquidity, limited the capital absorbing capability, leading to disadvantages in the process of investment, and restoration of production activities. The high exchange rate also has a great impact on import and export activities. Therefore, as soon as we see opportunities from the macroeconomic situation in 2023, monetary policy has turned around.

In fact, the domestic and world economies are having many “gray” colors, and credit growth after the first 3 months of 2023 was only over 2%. This partly reflects the paradox of the market that money is stuck in a bank, while businesses in need of capital are unable to access it due to high interest rates.

Therefore, Mr. Pham Chi Quang said, although inflation has tended to slow down, economic growth is facing many challenges, so it is necessary to reduce interest rates to support growth. The SBV always manages to lower the interest rate level, lobbying commercial banks to cut costs to reduce lending rates.

Recently, four state-owned commercial banks, accounting for more than 50% of Vietnam’s credit market, have highly agreed with the policy of the Government and the State Bank in reducing lending interest rates.

However, many believe that the SBV may continue to loosen monetary policy, creating a supporting basis for the downward interest rate trend. According to experts at Maybank, Investment Bank, and the State Bank of Vietnam, the State Bank may reduce interest rates by another 50 basis points in mid-2023 and another 50 basis points in early 2024 due to moderate domestic inflation and the potential policy axis of the Fed. Previously, UOB experts also predicted that the SBV would continue to cut interest rates cautiously, focusing mainly on domestic inflation management.

Many experts also said that monetary policy must coordinate synchronously, flexibly and closely with fiscal policy in the current unpredictable context. According to Prof. Dr. To Trung Thanh, National Economics University, when pursuing inflation targeting policy, the State Bank needs to switch to a more flexible exchange rate management mechanism, and at the same time, it must remove difficulties for the bond market and securities to open up capital mobilization channels, increase business confidence in capital markets.


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