VietNamNet Bridge – Vietnam has decided to loosen monetary policies in 2015 in an aim to hasten national economy recovery. However, the narrowing of the gap between the dong and US dollar interest rates will worsen the dollarization situation in Vietnam.

The State Bank of Vietnam (SBV) has asked commercial banks to ease the medium- and long-term lending interest rate by another 1-1.5 percent in 2015, a move which implies that Vietnam accepts the loosening of monetary policies to help stimulate the economy.

The inflation rate in 2015 is forecast to be below 5 percent, the ceiling inflation rate set by the National Assembly. January 2015 was the third consecutive month that saw the minus consumer price index (CPI) increase (- 0.2 percent)

Vietnamese businesses still have to struggle hard to survive current difficulties. The global economies still cannot escape from the recession. Many countries have loosened monetary policies since the beginning of 2015.

SBV, therefore, also has to consider loosening monetary policies to give more strength to the national economy.

However, an analyst noted that the central bank will not hurry to slash interest rates right now as this would not help much to increase lending.

The businesses which have capital demand now are trying to get new loans to pay old debts. Meanwhile, other businesses are hesitant to borrow money because market demand remains weak.

The Bank of Investment and Development of Vietnam’s (BIDV) analysis team also thinks that the central bank will be cautious with the plan to loosen monetary policy.

“SBV does not want to fall into its own trap – narrowing the gap between the dong and the dollar interest rates,” a team report says.

At present, the gap is around 3-5 percent, and if the gap is narrowed, people with dollars will not sell dollars for dong, but would continue to hoard dollars.

If so, dollarization, a serious problem of the national economy, would become even worse. This would make it difficult for the State Bank to control the dong/dollar exchange rate, especially in the context of the greenback appreciation against most other hard currencies, including the euro and yen.

The report also pointed out that the central bank would keep a watchful eye over the crude oil price performance in order to make a reasonable move.

The oil price has tumbled from $100 per barrel to $47 per barrel. However, if the oil price bounces back, the loosened monetary policy would put the national economy into a bad fix.

Therefore, the analysis team believes that the interest rate should be eased by 0.5 percent instead of 1-1.5 percent, as stipulated in SBV’s Instruction No 01.

TBKTVN