A sensible move
After the central’s bank surprise move, commercial banks immediately responded by lowering their interest rates, with the largest four banks of Vietcombank, Vietinbank, BIDV and Agribank taking the lead.
Vietcombank cut rates on short-term loans to five priority sectors by 0.5 percentage points as of July 10, the same day the central bank’s decision took effect. The Saigon-Hanoi Bank (SHB) also announced that short-term lending rates to five priority sectors would be reduced to 6.5% per year from July 10. SHB General Director Nguyen Van Le said his bank’s decision represented its commitment to support individuals, businesses and to boost economic growth.
He added that many enterprises, especially those which are of small and medium-size, are finding it hard to access capital even though they have feasible business and repayment plans. Therefore, SHB’s decision will make it easier for its clients to access funding to develop their plans into revenue growth opportunities in the future.
Many experts commented that the SBV’s first rate cut in the past two years is a sign of the regulator loosening the monetary policy.
Dr Tran Du Lich, member of the National Financial and Monetary Policy Advisory Council, also said that the central bank’s decision to cut rates is a positive policy move in line with current developments on the market. The consumer price index (CPI) now stands at a low level, with CPI in June 2016 up by just 0.2% from December last year.
He emphasised that low inflation gives the SBV room to cut interest rates and projected that interest rates could go down by a further 0.25 to 0.5 percentage points, which he said is a good sign for the economy.
A lever to boost economic growth
The economy has shown positive signals after banks began to cut lending rates but it will take time to see if these signs of optimism translate into real results or not. Whether the central bank’s move will become a lever to boost economic growth in the remainder of the year as expected depends on the efforts of not only the banking system but also close coordination between relevant ministries and agencies.
According to expert Tran Hoang Ngan, the central bank’s rate cut will help commercial banks to cut their input costs, especially with a lower rediscount rate, commercial banks will be able to use special bonds to borrow at cheaper rates. However, with the policy also comes a time lag and therefore is unable to create an immediate impact on lending rates to normal sectors.
Sharing the same view, expert Can Van Luc said that for now the rate adjustment will only affect lending rates to priority sectors while there will still be a certain delay before other sectors feel the impact.
Moreover, other supportive measures are needed for the central bank’s rate cut to produce the full effect. For example, the State Bank should take action to curb credit growth at a reasonable level to prevent a monetary oversupply from exerting pressure on inflation and exchange rates. At the same time, measures are needed to mobilise foreign currency funds into production and discourage capital from flowing into risky sectors.
The Vietnam Institute for Economic and Policy Research (VEPR) also states that the central bank’s rate cut is the right move to facilitate the business community.
In addition to various positive signs, a recent report released by the IMF shows that Vietnam’s credit at the end of 2016 was equivalent to 124% of GDP, higher than the ASEAN-5 and other middle-income economies, especially those with the same level of development as Vietnam. This ratio is approaching the level of the previous period of instability and could lead to risks to financial imbalances in the banking system and inflation. As such, the State Bank should still be cautious with the prospect of rising inflation in the time ahead when the effect of loosened monetary policy becomes more visible.
VEPR Director Nguyen Duc Thanh noted that in any circumstance, it is very difficult to fix if a policy intended to boost growth, or for other purposes, leads to macroeconomic instability. Therefore, the State Bank should be cautious in carrying out its monetary policy.
