Monetary policies: highlights of early 2021
By Pham Minh
|Consistently low interbank interest rates since the start of 2020 (except on a few days, when an unexpected drop in liquidity pushes up interest rates) have enabled banks to keep deposit and lending interest rates manageable to boost production and investment – PHOTO: TRAN NGOC LINH|
The State Bank of Vietnam (SBV) has loosened monetary policies since the start of this year to fuel growth as macroeconomic fundamentals remain favorable. Maintaining the values of key interest rates and sustaining policies aimed at supporting enterprises battered by Covid-19 are among the highlights of monetary policies in 2021.
Monetary policy management is inextricably tied with macroeconomic fundamentals. It is therefore important to review these factors as a necessary condition for policymaking of the SVB, the central bank. Two key variables, inflation and the exchange rate, were rather encouraging in the first four months of this year.
Inflation in the first four months only rose by 0.89% year-on-year, the lowest since 2016 (according to the General Statistics Office). However, there is enormous inflationary pressure due to rising global money supply and the recovery of the global economy and trade following stimulus packages. The prices of commodities such as fuel, oil and agro-products have faced upward pressure. However, since prices were relatively high in Vietnam last year, especially in the first two months of 2020, the year-on-year increase observed in 2021 was not drastic.
Exchange rates remain stable. As the U.S. Federal Reserve (Fed) continues easing monetary policies by maintaining its target interest rates at around 0% and buying bonds worth US$120 billion per month, demand for holding the greenback, both worldwide and in Vietnam, has fallen. This has been a blessing for the dong. Dollars pour into Vietnam, leading to surpluses in both trade and capital accounts, contributing to exchange rate stability.
The value of the dong, in terms of dollar or prices, has therefore not undergone much change. This paves the way for the SBV to aim to support firms and nurture growth after the pandemic, with several highlights.
Key interest rates remain unchanged
Key interest rates, including deposit interest rates, lending interest rates, open market interest rates and discount interest rates, remain unchanged from those at the end of 2020. They convey the SBV's message on economic prospects. Central banks have not changed interest rates since the year started as the pandemic remains complicated and threatened recovery.
Open market operations allow the SBV to manage interbank interest rates via valuable papers (repo) and bills. Since the beginning of 2021, the repo channel has remained open while there is no new issuance of bills. This shows the SBV is ready to ensure liquidity in the banking system and wants to keep interbank interest rates low (it has not issued bills to slash liquidity). These are signals of monetary loosening.
Consistently low interbank interest rates since the start of 2020 (except on a few days, when an unexpected drop in liquidity pushes up interest rates) have enabled banks to keep deposit and lending interest rates manageable to boost production and investment.
Moreover, as other interest rates remain stable, government bond interest rates have remained low although there is enormous pressure to issue more bonds to finance ambitious spending plans—for instance, spending for investment and development is expected to be VND477.3 trillion, or 28.3% of the budget (26.9% in 2020), up VND6.7 trillion from that in 2020. Stable government bond interest rates show that the State Treasury can raise funds at reasonable costs and the Government is in a good position to expand public investment to fuel growth.
In other words, as key interest rates remain largely unchanged, other interest rates have also stayed low, helping firms, private investors and public investment to strive for growth.
Debt restructuring for those affected by Covid-19
The SBV has issued Circular 03/2021/TT-NHNN dated April 2, 2021 on debt restructuring for those affected by Covid-19 up to December 31, 2021. In other words, debt restructuring plans in 2020 were extended until the end of 2021.
This will ensure liquidity for firms, but may spell trouble for banks as short-term deposits are vital for the latter. However, since the SBV seems prepared to safeguard liquidity for the banking system via open market operations, the central bank has indirectly helped enterprises via banks.
Spot forex transactions is stopped in favor of forward agreement
On December 31, 2020, the SBV officially stopped spot forex transactions. On January 4, 2021, the central bank announced its six-month forex purchase at VND23,125 per U.S. dollar. This is to avoid the third criterion that the U.S. Department of Commerce uses to determine whether a country manipulates its currency.
This means the SBV will purchase a large quantity of foreign currencies by the end of this year. As more dong is injected into the market, there is ample scope for keeping interbank interest rates low. This move also shows the SBV's commitment to expanding its foreign reserves, arguably the main forex management objectives as the Fed may raise the dollar interest rates in the near future, when recovery fuels inflation.
The first few months of 2021 offer some good macroeconomic news and show that the authorities are flexible in their forex management in conformity with a multipurposeful policy. However, global financial risks have emerged and exerted pressure on monetary policies in the second half of the year clearly evidenced by the return of high inflation and credit growth, and "hawkish moves" by the Fed anticipated by investors. Will the good news remain and what new pressure on monetary policies will emerge?
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