Dr Vu Viet Ngoan, Deputy Chairman of the National Assembly’s Economics Committee, in the recent interview given to Dau tu chung khoan, said that the State Bank should ease the tightening of the monetary policy in order to reduce the interest rates further

Dau tu chung khoan: Why do you think that it is necessary to ease the tightening of the monetary policy?

Vu Viet Ngoan: Reducing the interest rates is the task which has been assigned by the Government to the State Bank of Vietnam. However, the interest rate reduction must be obtained by applying economic measures rather than administrative orders.

The interest rates in Vietnam are the highest in the region. Noting that the world’s economy is recovering, it is clear that the interest rates remain unreasonably high and have not gained the sustainable development like in the pre-crisis period, and that the competitiveness of Vietnamese goods remains low. The interest rates would also be considered high when compared to macroeconomic indexes.

With the inflation rate possibly to be curbed at eight percent this year, the deposit interest rate of over 10 percent proves to be unreasonable.

Dau tu chung khoan: How high the interest rates should be, then?

Ngoan: In principle, interest rate is the ‘price’ of money which is decided by the supply and demand. The money supply and demand itself defines the reasonable interest rates, we cannot intervene the interest rates with administrative orders.

However, the State, which takes the responsibility of managing macroeconomic policies, has to take comprehensive measures in order to create the most reasonable interest rates control the inflation and foster the economic development. This is the task of the Government, and of the State Bank in particular.

In order to have reasonable interest rates, the State Bank needs to use the ‘monetary policy tools’ so as to flexibly adjust the volume of cash in circulation. If the interest rates in the market are overly high, this means that the credit demand is higher than the supply. In this case, the State Bank has to increase the cash supply to the national economy in order to ease the interest rates. In contrast, if the interest rates are too low, this means the cash supply is overly high which would cause high inflation. In this case, the State Bank needs to withdraw money from circulation in order to raise the interest rates to reasonable levels.

Based on this principle, if we predict that the inflation rate of the whole year 2010 would be at 8 percent, it would be reasonable to set the deposit interest rates at 9-10 percent. And when the deposit interest rate is at 9-10 percent, the lending interest rates of 12 percent would be reasonable, which will help businesses access capital at a reasonable cost.

As far as I know, the formula that commercial banks apply when calculating lending interest rates for medium and long term loans is as follows: the interest rate of one year term deposits plus two or more percent.

Dau tu chung khoan: So what policies should the State Bank apply in order to create reasonable interest rates?

In order to ease the interest rates, it is necessary to ease the tightening of the monetary policy, which creates more liquidity for the national economy.

The State Bank of Vietnam should pump more money into circulation though the open market operation (OMO). This is the key ‘tool’ which should be used at this moment.

Source: Dau tu chung khoan