Raising key rates cannot cool surging inflation, says official

The state bank’s increases in key rates this year have resulted in no positive impact on the accelerating inflation, says an official from the State Securities Commission (SSC).

The State Bank has no policy rate relying on the reserve requirement, which is among the three efficient tools including reserve requirement and repurchase rate to fight inflation, says Bui Nguyen Hoan from SSC (Photo: Minh Tri)

“Commercial banks rely on the central bank’s benchmark rate to set lending and depositing rates,” says Bui Nguyen Hoan, chief representative of SSC in Ho Chi Minh City.

“They also rely on the investment and credit demand to mobilize fund. Therefore no amount of cash is retained in banks or the state bank’s treasury. As a result, the inflation remains on a rise although the state bank raises key rates.”

The annual inflation rate topped 20 percent in June, the highest since November 2008, but the monthly consumer price rise dropped to 1.09 percent compared with May, after 2.21 percent between April and May.

Hoan says Vietnam’s banking system has “two levels”, including the State Bank of Vietnam and commercial banks.

“Cash flowing into commercial banks is different with one poured into the state bank. Thus the central bank’s key rate cannot control the cash flow in circulation,” he says in an interview with Dau Tu Tai Chinh Newspaper.

Hoan cites that in 1988, the state bank – the only credit institution at that time - succeeded in curbing the soaring consumer price of 774 percent by raising the rate on dong deposits to 156 percent per annum from 18 percent per annum. 

“The high interest rate helped the state bank to attract a huge cash flow, enabling them to stop printing more money for credit to production and cut the surging inflation,” he says.

The current interest rate leaves many enterprises with two options - retaining their businesses without making return or shut down – and force investors to abandon the stock market, Hoan says.

Some lenders are paying depositors at the rate of 18-19 percent per annum, while charging borrowers an interest rate of 24-25 percent per annum or even higher, according to Hoan.

“It [high interest rate] hinders the country’s equitization. Investors withdraw their investment from the stock market to pump into lenders,” he says.

The Ho Chi Minh Stock Exchange’s benchmark VN-Index has tumbled 63 percent from its record 1170.67 in March 2007. This year alone it retreated 12 percent.

The state bank boosted its refinancing and repurchase rates on April 1 and lifted reserve ratios for dollar deposits in May in extending the fight against inflation this year.

However, Hoan notices that Vietnam’s central bank has no policy rate relying on the reserve requirement, in which he believes that it is among the three efficient tools including reserve requirement and repurchase rate to fight inflation.

“Many developed countries’ central bank including US’s Federal Reserve and the Europe’s Central Bank has a discount rate that is the minimum interest rate for lending to other banks,” he says.

By Anh Khue – Translated by Vu Minh

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