Loosened monetary policy move

Last week, the State Bank cut its one-week lending rate via open market operations (OMO) from 15 to 14 per cent, per year after continuous hikes since last November from 8 to 15 per cent, per year.

Credit Suisse’s economist covering Vietnam Santitarn Sathirathai said it had signaled an earlier-than-expected policy U-turn and reflected the government’s long-standing bias in favour of growth over stability, which caused the current high inflation and trade deficits in the first place.

“Based on our view that year-on-year inflation is yet to peak and month-on-month inflation pressure is still strong, we think the decision to cut the rate is premature, and risks sending a confusing signal to the market,” said Sathirathai.

However, State Bank Monetary Policy Department head Nguyen Ngoc Bao said it was unnecessary to translate this rate cut into policy loosening.

“OMO is a channel to support banks in urgent need of liquidity. It is just for one-week tenor,” said Bao.

Via OMOs, banks borrow money from the authority with collateral being valuable papers such as government bonds.

Le Xuan Nghia, deputy chairman of the National Financial Supervisory Committee, said banking system liquidity was much improved over the past few months.

“However, some small-scale banks are still facing certain difficulties and this OMO rate cut is designed to assist those ones, I think,” said Nghia.

Sathirathai added that the early policy U-turn was not entirely unprecedented and a further 2 per cent of cuts in the OMO rate was expected before year’s end.

“As monetary policy works with a lag, the impact of this policy reversal should be visible in the growth and inflation data next year. Accordingly, we are revising upwards our 2012 average inflation forecast from 7.5 to 9.5 per cent while our real gross domestic product (GDP) growth forecast only benefits marginally going from 6.0 to 6.2 per cent as the inflation concerns and trade deficits still act as a drag on investment,” said Sathirathai.

The OMO rate cut was the first move of its kind since the beginning of 2011. By end of June, year-on-year consumer price index  has hit 20.8 per cent.

“If the government also lifts other tightening measures in the next few months, then we fear that the economy might be trapped in the familiar stop-go cycle, undermining economic stability,” Sathirathai said.