Call to cut statutory reserve ratio to 8%

Wednesday, May 7, 2008
The State Bank of Viet Nam should shift from monetary tightening up move to close control through reducing the compulsory reserve ratio from the current 11% down to 8% first off, proposed Prof Dr Tran Hoang Ngan, member of the National Finance and Monetary Policy Consultancy Council.

Many countries now carry out monetary polices in line with the core inflation (that is the inflation index excluding some kinds of goods with easily changeable prices such as fuel, energy, power, food) to monitor the market. The scientific calculation of core inflation will help SBV get more flexible in solving interest rate problem because shocks caused by prices of basic kinds of goods are rejected.

Despite the US Federal Reserve Fund (Fed) recently cut the federal fund rate down to 2%, the country's inflation still stood at high with the CPI (headline inflation) was up to 4% and core inflation of 2.4%. meanwhile, US banks' deposit interest rate is only at 2-3% per annum, In Thailand, the CPI last year rose by 5.3% and core inflation was recorded at 1.8%. But the Thai central bank adjusted the discount interest rate at 3.25% while Bangkok Bank raised the bath deposit with the interest rate of 2.5-3% per annum. Some other nations such as Canada, Philippines and Singapore also saw a similar inflation situation. As comparing CPI with deposit interest rate, if US Federal Reserve and many countries are monitoring the monetary market with negative interest rate policy?

Vietnam's CPI during the first four months of 2008 increased by 11.6% that could climb to 15-20% by the year end with the government's subsidisation in prices of petroleum, electricity, coal and steel. Factually, one of reasons causing new highs of CPI is the increase in prices of crude oil and food. In the intentional market, the oil price is soaring due to the shortage of the supply, the US dollar banknote is weaker and others.

Thus, Vietnamese state could not subsidise prices of food and crude oil in a long time, which could push the CPI to rise by over 20%. So SBV's current monitoring method based on CPI is inexact. If the deposit rate is over 20% per annum, the lending rate can jump to the unimaginable high. By that time, businesses cannot borrow loans for business and production expansion, leading to business inefficiency, fall in people's income and rise in the unemployment. If people have no money to deposit at banks, the economy, stock market and real estate market could not rally. It is confirmed that Vietnam's positive interest rate policy against CPI is not totally reasonable.

The effectiveness of monetary tightening up policies is promoted as banks' outstanding loans in April fell sharply. However, now is right time to loosen the policies. But, in fact, the increasing CPI is also caused by overspending of 5% GDP and speculation. Therefore, SBV should change monetary policies to strict control through reducing the compulsory reserve ratio from the current 11% down to 8% first off whereby the tense in the monetary market will be eased and the pressure of money supply via the open market will be lowered with an acceptable overnight interest rate.

Usually, along with CPI, some nations use core inflation to monitor interest rate policies because core inflation reflects inflation more exactly than CPI that is affected by short-term factors such as prices of petroleum and food.

It is right time that General Statistical Office should announce the core inflation of Vietnam to help SBV release monetary policies. As estimated, the core inflation accounts for about 70% of CPI. (NLD)