The worsening coronavirus (Covid-19) outbreak has thrown the global economy into a downturn. In the United States, the Federal Reserve slashed interest rates to close to 0% in just two weeks. Following the Fed’s move, many central banks took similar actions. In Vietnam, the SBV also immediately lowered interest rates in order to assist businesses.
The SBV’s decision is appropriate given the international market developments, with inflation pressure decreasing thanks to sharp falls in oil prices, and is especially supported by the firm macroeconomic foundations of recent years, said Pham Thanh Ha, head of the SBV’s monetary policy department.
Ha stated that with policy interest rate cuts, the central bank has signalled its willingness to support credit institutions when they need access to funds.
According to the central bank official, the move to cut rates was made after weighing macroeconomic factors to ensure the inflation control goal and the safety of credit institutions.
In addition to the interest reduction and exemption policies already in place, the 0.5 percentage point cut to short-term lending to priority sectors will also help businesses cut costs.
With the reduction in interests on deposits of less than six months, credit institutions will be afforded the condition to restructure loan repayments in line with a previous SBV circular on supportive measures for businesses hit by the coronavirus outbreak.
Following the central bank’s move, the market saw commercial banks simultaneously slashing their interest rates on deposits of terms of under six months, with the highest rates currently not exceeding 4.75%.
Support for growth
According to economist Vo Tri Thanh, the reduced deposit rates are still attractive enough to encourage the people to store their money in bank vaults. In addition, the sharp reduction in the refinance rate shows that SBV is ready to provide funds at lower costs, enabling commercial banks to be bolder in restructuring their existing loans and cut rates to new loans.
Dr Bui Quang Tin also stated that bank savings remain an appropriate investment channel in this situation, with a risky stock market and poor liquidity in the property market. The current rate, which is higher than expected inflation of 4%, is still generating certain profits for depositors.
HD Bank Deputy General Director Le Thanh Trung said the SBV’s rate cuts will help the bank lower its lending rates and provide better and more sustainable support to its business customers. Specifically, HD Bank will review businesses hit by Covid-19 and take appropriate support measures.
This round of rate cuts is expected to open the door for a stronger flow of low-cost loans to the economy. Many economists stated that such cuts will not exert a large impact on macroeconomic stability but will indirectly bolster economic growth.
According to Dr Le Xuan Nghia, the factors that can affect macroeconomic stability such as inflation and exchange rates are easing. The US Fed’s rate cuts, for instance, will decrease the price of the US dollar, thereby reducing the pressure on exchange rates.
In the meantime, the factors that drove up inflation in the first two months of 2020 were mainly shocks from the supply side such as pork, fuel and healthcare price increases.
But since the current demand is relatively weak, the impacts of supply-side shocks will let up in the coming time. The pressure of money supply from credit growth is even lower. In early March, credit growth was just 0.1% when commercial banks’ liquidity remained abundant.
As such, the SBV’s rate cut move was not intended to boost demand but was designed to support businesses to overcome this difficult time so that they can recover when the Covid-19 epidemic is over.