Former Minister of Trade, Truong Dinh Tuyen, in the talk with the press said that the interest rate lowering needs to be associated with the fight against dollar speculation.
Some experts said that Viet Nam should not apply the interest rate subsidy scheme but should help banks reduce lending interest rates by slashing the recapitalization and re-discount interest rates. What is your viewpoint about that?
Slashing interest rates to help reduce the capital cost proves to be the measure other countries always use when they want to stimulate economic growth. Most of the countries use the monetary policies as the tool to reach that end.
In Viet Nam, the Government uses both the monetary and fiscal policies to obtain the interest rate reductions. It slashes basic interest rate, which leads to the decreases of the lending interest rates. It also uses the state budget to prop up interest rates for businesses (the Government has announced the 4% interest rate subsidy).
The second measure has not been applauded by many economists, who believe that the lending interest rate reduction should be obtained with monetary policies through the reductions of recapitalization and re-discount interest rates.
In theory they are right. However, they need to consider the specific conditions in Viet Nam, where the path of slashing interest rate proves to be relatively narrow. In order to slash lending interest rates, we need to slash deposit interest rates.
Meanwhile, if we slash deposit interest rates, people will not make deposits at banks any more as they still can see risks of the high inflation and trade imbalance. If people don’t make VND deposits at banks and shift to keep dollar, the national economy will be threatened by the dollarization, which will put a hard pressure on the VND/US Dollar exchange rate.
In such a condition, the application of both the monetary and fiscal policies proves to be acceptable.
The basic interest rate has been slashed to 7% per annum, which will lead to the VND interest rate to decrease further. Could you please tell me how will this influence the VND/US Dollar exchange rate?
As the stock and real estate markets remain stagnant, people will pay more attention to three investment channels: bank deposits, gold, and the dollar.
When the deposit interest rates go down, people tend to purchase dollars and gold to store up. As the liquidity of the greenback is considered higher than gold, dollar speculation seems to be a more favourite choice. Therefore, the interest rate reduction will pressurize the exchange rate.
That is one of the reasons some economists have cited to ask not to slash the basic interest rate too sharply. That also explains why the Government has to apply both the interest rate subsidy and basic interest rate reduction.
I personally think that we should not slash basic interest rate sharply, and we should remove the basic interest rate scheme as the tool to define the ceiling interest rate, and this should be done as soon as possible.
What do you think about the exchange rate policy being followed by the State Bank of Vietnam? Do you think that the VND should lose its value further?
Before the State Bank of Viet Nam raised the interbank exchange rate by 3% and kept the trading band unchanged at +/-3%, nearly all of the members of the National Advisory Council for the Monetary Policies suggested the devaluation of the VND against the greenback.
However, there exist two different viewpoints about the exchange rate regulation. Some said we should only adjust the interbank exchange rate and not loosen the trading band, while others believe that we should not adjust the interbank exchange rate and should only loosen the trading band.
I think that the VND needs to be devaluated in the current conditions, when the export markets have been narrowed, the foreign investment and foreign currency income are expected to be lower than the previous year.
I also think that we should not let the trading band be too wide, and that the band should not be higher than 5-6%. Therefore, we need to adjust the interbank exchange rate as well. The latest move by the central bank to raise the interbank exchange rate by 3%, which I think is a wise move.
Our foreign currency reserves are now higher than that in March 2008, allowing the State to take initiative in controlling the exchange rate which can help curb trade deficit and fight against speculation as well. (Tien phong)
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