Reserve hike scotched

Raising reserve requirement at this moment will hurt banking system liquidity

State Bank governor Nguyen Van Giau said: “Hiking the reserve requirement ratio at this moment is impossible. This will certainly hurt banking system liquidity which is still a bit fragile.”

Two weeks ago, Le Duc Thuy and Le Xuan Nghia, chairman and vice chairman of the National Financial Supervisory Committee, the office in charge of supervising the financial market, said hiking the reserve requirement was the most appropriate measure to fight inflation.

“Hiking this ratio would provide a sizeable amount of money to the central bank to intervene in the market. For instance, they can extend cheap loans to troubled small scale-banks,” said Thuy, who led the central bank from late 1999 to July 2007.

Giau said only the State Bank knew whether the banking system needed a reserve requirement ratio hike or not.

At the moment, the reserve requirement for Vietnam dong deposits with terms of less than 12 months is set at 3 per cent. For deposits termed over 12 months, the level is 1 per cent.

HSBC’s economist for ASEAN region Sherman Chan said the monetary policy remained accommodative, with all key policy rates still below inflation.

“There is certainly scope for further tightening. Policymakers are expected to concentrate on rates that carry a larger impact such as the reverse repurchase rate rather than rates that may have more of a psychological instead of an actual effect such as the base rate,” said Chan.

On February 23, the State Bank decided to lift the seven-day lending rate to local banks via open market operations from 11 to 12 per cent per year. This rate is called reverse repurchase rate.

It should be noted that this was the fourth raise since November, 2010 from the long-lasting 7 per cent per year level to the current 12 per cent per year.

“Despite having gone up already by 5 per cent since November, 2010, we expect further hikes to the reverse repurchase rate, which should take it up to 14 per cent, per year by the end of second quarter in 2011,” said Chan.

Headline inflation in Vietnam accelerated to 12.3 per cent year-on-year in February, 2011, drifting further away from the government’s ambitious target of curbing inflation to 7 per cent this year.