On May 17, 2011, the State Bank of Vietnam (SBV), raised the repurchase rate by 100 basis points to 15 percent from 14 percent. This is the second time in two weeks the SBV made this decision. Rates on interbank market have been revised up 800 basis points since early November 2010 in an effort to stave off high inflation.
Open market operations (OMO) interest rate is the interest rate that commercial banks put in a Treasury bill auction held by the SBV on the open market. The central bank on the market acts as the buyer and seller of short-term valuable papers from and to commercial banks to regulate money supply in the system. If [the central bank] wants to increase money supply into the system, it will act as the buyer of valuable papers from commercial banks. Through this operation, the central bank will directly impact the source of working capital at credit institutions to regulate money supply and indirectly impinge on the market interest rate
According to many economic specialists, the central bank’s decision to hike the OMO rate is absolutely reasonable. Mr Vo Tri Thanh, Deputy Director of the Central Institute for Economic Management (CIEM), said this decision transmits the message that the SBV continues with tightened monetary policy despite complaints from many businesses.
Mr Nguyen Xuan Thanh, Director of the Fulbright Economics Teaching Programme, said this showed the ironclad action in regulating the tight monetary policy to stem inflation.
OMO rates have a strong influence on commercial banks as higher borrowing costs with the SBV will inhibit commercial banks from this source of loan. This is also a measure that the SBV uses to force banks to be more cautious with their credit operations and restrict money supply.
Currently, with the ceiling deposit rate of 14 percent per annum and the OMO rate of 15 percent, banks will have to mobilise capital from the public because borrowing costs are lower. Mr Thanh explained that banks’ operations are characterised by deposit mobilisation and lending; thus if rates from the SBV are lower, they will tend to borrow money from this source and this move will cause higher inflation. Therefore, the SBV’s policy rate higher than deposit rates at commercial banks is absolutely reasonable.
Although it hiked OMO interest rates, the SBV still kept other key rates (refinancing and rediscount) unchanged.
Earlier, in April 2011, the SBV hiked refinancing and rediscount rates by 100 basis points to 14 percent and to 13 percent, respectively.
Hai Hang
Vietnamese
