Bold steps set to curb inflation

January 18, 2005 | 17:41
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State Bank of Vietnam governor Le Duc Thuy is preparing to take bold steps to keep inflation tracking at below 6.5 per cent this year.

The inflation limit will help control the conversion of dong into dollar deposits

Thuy told a media conference last week that maintaining inflation at under this level would help limit the conversion of dong into dollar deposits and reduce the pressure from increasing deposit interest rates.
“I believe the [inflation] target will be realised,” he said, adding the central bank had already taken measures towards achieving this.
Thuy said the initial steps included the State Bank’s decision to raise the discount and recapitalisation interest rates both by half a point to respectively 3.5 per cent and 5.5 per cent per annum, effective since January 15.
“The increased interest rates are a signal on [the State Bank’s] stance that commercial banks should satisfy their demands for capital by seeking funds from the public and corporate communities other than recapitalising from the central bank. Otherwise they will have to pay more for this capital,” he said.
The State Bank also decided to retain the ratio of standby funds applied since the second quarter of last year and continue to stabilise the exchange rate to prevent shocks to the market. Simultaneously, effective measures will be employed to keep credit growth within the target of 25 per cent this year.
“We will absolutely make necessary adjustments depending on market performances,” the governor said.
Thuy explained lifting recapitalisation and discount rates was one of the central bank’s moves to respond to market signals. They include the price-rise trend generally seen in the first quarter each year, especially before the Lunar New Year and state employees’ salary increases. An additional pressure this year was the return of avian flu in the Mekong Delta, with fears it may spread to other cities and provinces.

“We hope that the price index will not exceed 4 per cent in the first quarter to keep the inflation at below 6.5 per cent in 2005 as targeted by the National Assembly. Otherwise greater efforts will have to be exerted,” he said.

Thuy rejected criticism that the State Bank was unable to manage last year’s inflation growth within objectives and allowed it to reach 9.5 per cent by year-end.

“I do not think the central bank was unable in control inflation last year.”

The State Bank governor said the central bank had conducted analyses of last year’s trends and inflationary pressures to devise responses; however, “the causes of [inflation growth] did not lie in monetary factors”.
“If tightened monetary policy was applied, we might have not been able to keep the inflation at the 9.5 per cent and obtain 7.7 per cent economic growth,” Thuy said.
He noted tightened monetary policy might actually lead to greater capital costs, increased prices and inhibit investments for development.
“Whether we could have applied more effective measures if we could begin [last year] again are impossible to answer,” he said.
However, citing the positive observation from the World Bank at the Consultative Group meeting in early December last year, Thuy believed the bank’s decisions was appropriate.
“Many of Vietnam’s competitiveness indicators felt last year. Still our macroeconomic stability indicator ranked 23 among 104 countries,” he said.
Looking ahead, Thuy said interest rates would increase slightly this year considering the economic growth target of 8.5 per cent, which he said would foster greater demand by businesses for investment capital.
The State Bank would also consider applying a new basic interest rate to replace the current one that Thuy admitted was “giving no direction to anyone”.
“In other countries, the central banks normally apply their basic interest rate via the inter-bank market,” he said.

By Thu Ha

vir.com.vn

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