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Curbing inflation: large ‘dose of medicine’ may cause after-effects

If inflation cannot be controlled and Vietnam has to use a “high-dose drug”, such as an interest rate increase, serious consequences may occur.

In general, interest rate hikes to combat inflation will cause the economy to decline or grow below potential.

The latest report about the monetary market by the Saigon Securities Incorporated (SSI) shows that deposit interest rates applied to individual clients have been raised slightly at some small and medium sized banks. The deposit interest rate applied to institutional clients has increased by 0.2 percentage point at big joint-stock banks.

Except for joint-stock banks where the state holds a controlling stake, other banks have adjusted their deposit interest rates by 0.3-0.5 percentage point compared with late 2021.  Meanwhile, the interbank short-term interest rates increased by 0.1-0.4 percentage point in May.

According to the State Bank of Vietnam (SBV), as of April 25, outstanding loans had increased by 6.75 percent compared to the end of 2021, while mobilized capital had risen by 3.55 percent only. This affects the liquidity of banks.

Meanwhile, there is pressure on inflation as petroleum prices and the prices of input materials are increasing sharply. For every one percent increase in material prices, the prices of finished products will increase by 2 percent, which leads to higher inflation and puts pressure on interest rates.

The US Federal Reserve (FED) has raised interest rates and is expected to continue to raising interest rates further to control inflation. This is another factor expected to have an impact on Vietnamese-dong interest rates.

The question is whether the State Bank of Vietnam (SBV) will change monetary policy.

Economists believe the monetary policy will be adjusted in the second half of the year. 

“The demand for capital is increasing because of credit growth, especially in the last months of the year. This, plus pressure on inflation, makes it difficult to maintain interest rates at historic low levels,” said Nguyen Tri Hieu, a finance and banking expert.

Tran Hoang Ngan, a respected economist, has warned of high inflation this year. 

He said Vietnam’s economy has high openness, which means that when prices in the world increase, prices in Vietnam will go up right away. This is called “imported inflation”.

The current global situation is complicated with prices increasing - not only oil and gas prices but also wheat, rice and fertilizer prices. In Vietnam, a liter of petrol costs over VND30,000. The price increases will be reflected in the consumer price index (CPI) in the next months and will lead to interest rate hikes.

Solutions

According to the National Assembly’s Economics Committee, Resolution No43 requests the government to instruct commercial banks to cut operation costs so as to reduce the lending interest rates by 0.5-1 percentage point in 2022-2023.

However, some commercial banks are raising deposit and lending interest rates.

Pham Nam Kim, an economist, affirmed that SBV and commercial banks will adjust interest rates in the time to come, and the question is just how high the interest rate increases will be.

The anticipated interest rate hike has caused concerns to businesses. 

Nguyen Cong Quyet, the owner of a private enterprise in Thuong Tin district in Hanoi, which makes electrical appliances, said he borrowed capital from a bank in October 2021. The interest rate was 7.9 percent per annum in the first three months, and was raised to 8.4 percent later.

The credit contract is about to expire and Quyet plans to sign another contract. However, he has been warned that the six-month loan interest rates will be higher.

Nguyen Hoang Son, director of An Son Co Ltd in Hanoi, said the 12-month deposit interest rates applied by many banks are nearly 7 percent per annum, so banks lend at 10.5-11 percent per annum. If deposit interest rates continue rising, lending interest rate hikes will be unavoidable. 

Meanwhile, input costs for production and business, including petrol and raw materials, are increasing. The burden on business will be wider if interest rates also increase. Most enterprises are financially exhausted after two years of Covid-19.

The central bank is planning to launch a 2 percent subsidy interest rate package. VNDirect estimates that the package will help reduce the average lending interest rates by 0.2-0.4 percentage point in 2022. However, if banks raise lending interest rates, the actual influences of the package will be lower than expected.

Tran Thuy

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