Interest rates spiking growth limitation plans

Last week, the State Bank continued its monetary tightening policy by hiking the open market operations (OMO) rate by 1 per cent to 13 per cent per year.

On February 23, the State Bank lifted the seven-day lending rate to local banks via the OMO window from 11 to 12 per cent, per year. It should be noted that last week’s raise was the fifth one since December, 2010 from long-lasting 7 per cent, per year level.

Nguyen Dai Lai, vice head of the central bank’s Credit Information Centre, said that monetary tightening would make expanding credit growth more difficult. 

According to Sherman Chan, HSBC’s economist covering Vietnam, further monetary tightening should complement the recently implemented fiscal squeeze in the bid to curb inflation and rein in the trade deficit.

“With inflation likely to accelerate in coming months, especially due to higher retail energy prices, more tightening measures are expected on both the fiscal and monetary fronts,” said Chan.

Tran Phuong Binh, general director of Dong A Bank, said that with continuous monetary policy tightening moves, market interest rates would stay high. “Thus, banks would face certain difficulties in mobilising and lending. Banks will have to lend with more caution. Thus, the credit growth target of 20 per cent for the whole banking system might not be low,” said Binh.

For Dong A Bank, the estimated credit growth stood at 5 per cent in the first quarter of 2011. Two weeks ago, the State Bank also decided to raise the refinancing rate by 1 per cent to 13 per cent, nearly a month after hiking both the refinancing rate and discount rate to 12 per cent from 11 and 7 per cent, respectively to improve economic stability.

Two weeks ago, along with monetary tightening, the government also announced a cut in public investment equivalent to 7.4 per cent of budget expenditure for 2011.

Under tight monetary conditions, total credit growth in the first quarter stood at 5 per cent.  To date, the State Bank has chosen to hold off from changing the reserve requirement ratios. Chan said that this measure could be deployed later this year.

The combined effect of monetary and fiscal expansion throughout 2010 with the abolishment of price controls on petrol and electricity, and increasing soft-commodity prices globally had March’s consumer price index (CPI) reaching 2.17 per cent month-on-month.

On year-on-year basis the index increased by 13.89 per cent by end of March, the highest level in 25 months.