Getting Rid of Instability

According to its report sent to the Government, monetary market is showing signs of instability, which needs to be taken into consideration and have timely treatment. Deposit interest rates are reportedly quoted above the upper limit by the State Bank of Vietnam (SBV) in some places at the start of September. If this situation keeps going on, many banks will face liquidity drains.

 

In addition, on the interbank currency market, volume of trades tends to slow down. In September alone, the interbank transaction values fell 60 per cent. This forces the State Bank of Vietnam to take measures to support banks with liquidity problems in the time ahead. In addition, the fluctuation of domestic gold market has caused significant impact on the currency market.

 

These signs appear when inflation in September jumped 2.2 per cent against August, the highest month growth in 16 months. Notably, CPI growth in September 2012 was beyond the laws in recent years. According to National Financial Supervisory Commission, if seasonal factors are excluded (adjusted to education costs and pharmaceutical prices), the September CPI was 1.05 per cent and adjusted core CPI was 0.7 per cent. Thus, CPI increase was not caused by macroeconomic policies but this strong change probably resulted in negative psychology which may affect behaviours of consumers and businesses as well.

 

When Vietnam’s expected inflation remains high, market-based adjustments to prices of basic goods and services at market prices should be calculated carefully in both time and degree.

 

These signs happen at the same time. If they are not addressed soon enough, they will create resonance effects and cause negative psychological impact on the market - a major influence on the control of inflation in the last months of the year. Moreover, if gold market fluctuations alter the balance of gold supply and demand, the foreign exchange market will be inevitably impacted and foreign exchange rates will be stirred.

 

From its analyses, the National Financial Supervisory Commission said that Vietnam necessarily continues with its consistent targets of stabilising macro economy, maintaining reasonable growth, and specially giving priority to action-based inflation controlling, or in other words, implementing “target inflation” policies.

 

To achieve these targets, Vietnam needs to have careful calculations and take prudent steps to adjust prices of some goods and services. In October, no further price changes will be made in October to boost up market sentiment.

 

Secondly, it is necessary to take into account effects that may arise after November 25, 2012 when banks stop gold lending and deposit activities. The State Bank should soon announce policies related to the rights and interests of citizens and of other gold-related actors in the economy, including rights and conditions for gold mobilisation from the society or safekeeping for the public; gold transfer, buy and sale; gold import and export and inter-pricing mechanism for domestic and international bullions.

 

Thirdly, it needs to focus on solving difficulties to promote interbank monetary market in order to make it function as the monetary regulator and liquidity resolver for banks with temporary difficulties. And, the State Bank, as a "ultimate lender", only makes intervention only when the market fails to regulate. Besides, Vietnam must have effective measures, including strengthening market management and supervision to prevent the breach of ceiling interest rate regulations.

 

Fourthly, while market conditions are driven by psychological pressures, policy information becomes extremely important. Therefore, continued information of clearly defined policies, objective opinions, and effective troubleshooting solutions to hot market issues will have a very high effect.