So while New Zealand raised interest rates to control inflation, Vietnam will cut its key policy rates from tomorrow, as the government tries to support businesses and bolster a struggling economy.
The discount rate will be cut to 4.5 percent from 5 percent, and the repurchase rate will be lowered to 5 percent from 5.5 percent, the central bank’s monetary policy head Nguyen Thi Hong said at a briefing in Hanoi today. The refinancing rate will be reduced to 6.5 percent from 7 percent.
“The policy-rate cuts aim to deepen the government’s support to businesses,” Nguyen Dong Tien, State Bank of Vietnam’s deputy governor, said at the briefing. “The rate cuts will help boost lending demand and bolster economic growth.” The central bank has projected an annual credit growth of 12-14 percent, after loans rose 12.51 percent in 2013.
In parts of 2011, the annual inflation rate topped 20 percent. In 2013, it was 6.6 percent, the lowest in a decade, and Hong said the pace should again be below 7 percent this year.
“Domestic demand in Vietnam is very weak,” said Trinh Nguyen, Hong Kong-based economist at HSBC Holdings Plc. While the rate cuts are noteworthy, with the “sluggish pace of finance-sector reforms, growth and credit growth will continue to be very lackluster this year.”
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2 Comments
Hopefully domestic investment will decrease with inflation expectations below 7 percent as predicted and more Vietnamese will begin to apply for loans and stimulate growth through investments. In the long run this should be beneficial and stabilizing and may begin to increase global confidence in the long run as well. Lower interest rates may cause foreign investment to leave but hopefully not by much, considering only a .5 percent decline in most rates. The Vietnamese are looking to favor themselves and are betting on domestic investment, which hopefully can be bolstered.
Through what channels does monetary policy operate in the Vietnamese context? Are banks the primary credit creators, constrained by reserves? If so, then this is a statement about policies towards reserves, with the 50 bp drop in interest rates a signal and not in and of itself a substantive measure.
For the others in this class, be careful not to presume that all monetary systems operate in the same manner as that of the US. We tend to model monetary policy as effective due to the sensitivity of various parts of our economy to interest rates. Money creation – credit creation – is then endogenous. However, in developing countries that do not have “deep” financial markets the link can be more direct, with the central bank lending (directly controlling) reserves.
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