Lowering lending interest rates to inject more capital into the market?

Governor of the State Bank of Vietnam, Le Minh Hung, stated that the 0.25% annual reduction in policy interest rates is primarily a signal to the market, and the extent of the adjustment reflects careful consideration.

The decision to lower policy interest rates was made after the State Bank of Vietnam successfully controlled inflation and stabilized the exchange rate in 2016, the first half of 2017, and in the near future, while ensuring the system's capital and liquidity status.

The source is still being closely monitored.

In fact, it took more than three years (since March 2014) for the monetary policy regulator to make this decision.

According to Governor Le Minh Hung, inflation was controlled at a low level in 2016 and the outlook for 2017, but inflation expectations remain high.

On the other hand, this adjustment decision does not include a ceiling on short-term deposit interest rates. The regulator has been cautious in not directly impacting deposit interest rates – which are related to the system's funding sources in balance with credit growth (with lending rates in the first half of 2017 being better than in previous years).

Furthermore, the reduction in these indirect policy interest rates also avoids directly narrowing the USD-VND interest rate differential, thus limiting related fluctuations in the USD/VND exchange rate.

As mentioned above, the decision to reduce the exchange rate was made after the State Bank of Vietnam had successfully controlled and stabilized the exchange rate in 2016, the first half of 2017, and in the near future.

In parallel with the above steps, besides stabilizing the exchange rate, the head of the State Bank of Vietnam also affirmed that one of the priority goals is to continue controlling inflation, and this does not mean increasing the supply of capital to the economy.

The Governor noted that inflation in the first half of this year was low, partly due to lower food and fuel prices, but inflation expectations remain high; monetary policy must remain cautious (as evidenced by the 0.25% annual adjustment to the policy interest rates).

Accordingly, the State Bank of Vietnam will continue to closely monitor the flow of capital into the economy through lending activities. The credit growth targets for commercial banks will not be relaxed; the overall credit growth target for the year will remain under overall supervision at around 18%.

The first step

In this decision, the State Bank of Vietnam reduced the maximum short-term lending interest rate in VND by 0.5% per year for credit institutions to customers in certain economic sectors and industries. This decision directly impacts and supports the reduction of costs for the relevant business sectors.

As for policy interest rates, their value lies primarily in the signal they send to the market; indirectly, they support a reduction in lending rates through lower capital costs for credit institutions. This is the first step after more than three years, the result of balancing various factors such as resources, inflation, and exchange rates. In other words, it sends a message that the current interest rate framework is better than in previous years.

According to Dr. Trinh Quang Anh, Director of the Vietnam Economic Research Center, the refinancing and rediscounting interest rates have, in reality, had little effect on market interest rates. Therefore, their impact is primarily symbolic. What the market is waiting for is an adjustment in interest rates during open market operations (OMO), to have a more concrete impact on the system's capital.

According to the leader of a commercial bank, the decision to reduce policy interest rates has a signaling value, initiating expectations for a continuation of the goal of reducing lending interest rates, after the general level had already fallen to the lows before 2006-2007.

Regarding the impact on capital costs, the aforementioned bank executive stated that if the State Bank of Vietnam opens its doors, credit institutions could consider accessing the refinancing channel through VAMC special bonds after selling bad debts. Because after a 0.25% reduction, the refinancing interest rate is now 6.25% per year, while access to capital through this channel is only at a maximum of 4.25% per year as stipulated. This cost is worth considering, given that the ceiling on short-term deposit interest rates is 5.5% per year.

More broadly, the bank's leadership believes that, starting in August, the resolution on handling bad debts recently issued by the National Assembly will come into effect, providing a boost to the system to support bad debt resolution and is expected to produce tangible and faster results.

Accordingly, a large amount of non-performing loans will be restructured, creating further conditions for reducing lending interest rates, along with the supportive impact from the aforementioned decision to lower policy interest rates, instead of aggressively injecting new capital to lower interest rates and put pressure on inflation.

According to Minh Duc/vneconomy