Reduce lending rates to pump more capital into the market?

State Bank Governor Le Minh Hung said that the 0.25%/year reduction in operating interest rates is primarily a signal to the market, and the level of adjustment reflects careful consideration.

The decision to reduce operating interest rates was made after the State Bank controlled inflation and stabilized exchange rates well in 2016, the first half of 2017 as well as the near future vision, with the capital status and liquidity of the system guaranteed.

Still closely monitoring the source

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

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

On the other hand, this adjustment decision does not include a ceiling on short-term deposit interest rates. The operator has been cautious in not directly affecting deposit interest rates - related to the system's mobilization source in balance with credit growth (with the lending speed in the first half of 2017 being better than many previous years).

Furthermore, the reduction level and the above indirect operating interest rates also avoid directly narrowing the "dollar - VND" interest rate gap to limit related fluctuations of the USD/VND exchange rate.

As above, the decision to reduce was made after the State Bank had controlled and stabilized the exchange rate well in 2016, the first half of 2017 as well as the vision for the near future.

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

The Governor commented that inflation in the first half of this year was low, partly due to the decrease in food and fuel prices, while inflation expectations remained high; monetary policy must remain cautious (as shown by the adjustment of operating interest rates by 0.25%/year).

Accordingly, the State Bank will continue to closely monitor capital flows into the economy in lending activities. Credit growth targets at commercial banks will not be loosened; the overall credit growth target for the year will still be monitored at around 18%.

First step

In this decision, the State Bank reduces the maximum short-term lending interest rate in VND by 0.5% per year for credit institutions for customers in a number of economic sectors and industries. This decision has a direct impact, supporting the most direct cost reduction for related business sectors.

As for the operating interest rates, the value lies first of all in the signal to the market; indirectly supporting the reduction of lending interest rates through the capital costs of credit institutions. This is the first step after more than three years, the result of many balances in resources, inflation, exchange rates... In other words, it is a message that the current interest rate shaping foundation is better than in previous years.

According to Dr. Trinh Quang Anh, Director of the Vietnam Economic Research Center, the refinancing interest rate and the rediscount interest rate have not had much effect on market interest rates in the past. Accordingly, they focus on signal value. And what the market is waiting for is that the interest rate in open market operations (OMO) will also be adjusted, to have a more specific impact on the capital source of the system.

According to the leader of a commercial bank, the decision to reduce operating interest rates has signal value, starting expectations for a next phase of implementing the target of reducing lending interest rates, after the general level has decreased to the low level before 2006 - 2007.

Regarding the impact on capital costs, the bank leader said that if the State Bank opens the door, credit institutions can consider accessing the refinancing channel through VAMC special bonds after selling bad debts. Because after the 0.25% reduction, the refinancing interest rate is 6.25%/year, accessing capital through this channel has a chance of only up to 4.25%/year according to regulations. This cost is worth considering, when the ceiling interest rate for short-term mobilization is 5.5%/year.

More broadly, the bank's leader believes that from next August, the resolution on bad debt handling that the National Assembly has just issued will come into practice, the system will have a boost to support bad debt handling and is expected to create more substantial and faster results.

Accordingly, a large resource in bad debt will be regenerated, contributing to further reduction of lending interest rates, along with the supporting impact from the decision to reduce the above-mentioned operating interest rates, instead of pumping out new capital to reduce interest rates and causing pressure on inflation.

According to Minh Duc/vneconomy