Finance & Banking
Last updated: Monday, April 24, 2017
Monetary Policy to Balance TargetsPosted: Wednesday, September 28, 2016
The State Bank of Vietnam (SBV) is facing many intertwined goals of supporting growth, controlling inflation and stabilising interest and exchange rates.
Dilemma in administration
In the past years, monetary policy must always bear multiple objectives: macroeconomic stability, inflation control, business support and growth support. 2016 is no exception. Since the beginning of this year, the SBV has continued to implement consistent measures to steady the currency market, stabilise interest rates, and facilitate credit institutions to secure safe, effective and supporting credit growth in favour of economic growth.
Credit growth was 9.67 per cent in the year to August 31 and lending rates fell by 0.5 per cent in the face of rising pressures.
Dr Vo Tri Thanh, Member of the National Advisory Council on Financial and Monetary Policies, said that monetary policy seems to be a little loosened to achieve growth objectives set by the National Assembly and the Government. In spite of obtaining positive results, the central bank should not make light of administrative instruments and must particularly ensure cross-cutting objectives of macroeconomic stability and inflation control.
Another council member pointed out that the SBV is easing the monetary policy with a caution, unlike the uncontrollable easing in the 2001 - 2010 period when credit growth climbed 30 per cent. SBV is facing intertwined goals of supporting growth, controlling inflation and stabilising interest rate and exchange rate.
If there is just one objective, like economic stability or inflation control, the central bank may raise interest rates according to market developments. But, when the growth support is included, the SBV cannot do this, but lower interest rates to boost credit supply. Rapid credit growth will impact inflation in return.
“Therefore, the SBV is always placed in a dilemma. It has to fulfil a lot of objectives. Because of multi-purpose policy, the SBV must be flexible enough with its administration, response and policy. From this respect, the central bank has passed all market tests quite well," said the expert.
The advantage of multi-objective policy is relatively flexible and elastic but the SBV fails to obtain its long-term objectives and avoid side effects, he said, citing that the SBV effectively used bill instruments on the open market, regulated the money supply, steady interest rates and increase foreign exchange reserves.
However, we should not rule out the possibility that the central bank did not take back the money value as desired. Thus, there are three reasons for us to be cautious with money supply and credit in the coming time, said Dr Vo Tri Thanh.
Firstly, the risk of bad debt is on the horizon. Therefore, credit supply needs to be expanded while the quality of credit must be well controlled. Secondly, pressures on exchange rate and interest rate ease, but precautionary measures need to be handy in the remaining months of the year. For example, Janet Yellen, Chairman of the US Federal Reserve (Fed), said that Fed is sending signals of raising interest rates although the value changed is insignificant. This factor must also be taken into account.
Pressures will heighten if the regulator pursues policy easing. The third issue, according to Dr Thanh, is that monetary easing may result in negative psychological expectations over macroeconomic stability against the backdrop of budgetary strains.
Therefore in addition to growth support, the central bank still must ensure macroeconomic stability. It is important to let the market see, rapidly, strongly and clearly, strengthened budgetary disciplines. Otherwise, the market will lose confidence. For that reason, the central bank should continue hold fast to maintaining flexible monetary policy to support growth quality rather than growth quantity.
"Lack of confidence in short and medium-term stability is not good," Mr Thanh warned. Sharing the same point of view, HSBC analysts also recommended caution in using economic stimulus policies, especially when effective fiscal policy tool of the Government are still limited.
In the long term, to deal with shortcomings in the multi-objective policy, it is essential to clarify the SBV's objectives and assign clear tasks to the Ministry of Finance, said Dr Can Van Luc, a banking expert. For the time being, the SBV is taking on fiscal policy as well.
And, to maintain the current objectives, from now until the end of the year, the SBV cannot make light of inflation in monetary policy, he said. To do so, the SBV must cling to domestic and international market developments, particularly keeping track of Fed's interest rate policy and exchange rate regulations in countries with trade and investment relations with Vietnam.
The combination of special policy with fiscal policy and price control policy must continue to be executed better. The credit growth of 16 - 18 per cent is well-fit with the expected GDP growth of 6.1 - 6.3 per cent, said Luc. Using a variety of tools to steady interest rates, even amid potentially growing inflationary pressures, is a proposal put forth by Dr Luc to prevent market sentiment disturbance.
Furthermore, the central bank needs to urgently complete credit institution restructuring scheme and settle bad debts in the second phase. This is one of very critical issues in overall economic restructuring in the second phase, as well as the importance of accelerating bad debt settlement.
Without doubt, in the latest five years, monetary policy instruments have been used with great caution. The SBV has maintained this approach to ensure the permanent goal of macroeconomic stability even in the context of low growth and hardships.
This approach is expected to be upheld in the coming years because growth-driven monetary policy easing is posed to potential risks, especially in developing countries where macroeconomic background is not really steady.