Harmonious point for monetary policy rather than"trial and error"

Deputy Governor of the State Bank Pham Thanh Ha

Central banks in the world still follow the trend of tightening monetary policy. Why did the State Bank take steps to "upstream" to reduce operating interest rates, sir?

In the first months of 2023, many countries faced the risk of economic recession and high inflation, so the trend of monetary tightening is inevitable.

Although the economy also underwent a tough period, under the close direction of the Government and Prime Minister, the banking industry has been proactive, flexible, and quickly adapted to the administrative management of monetary policy and banking activities. Therefore, the SBV is one of the first central banks in the world to reduce the operating interest rate in the first months of 2023 to support economic recovery and development.

The State Bank of Vietnam has continuously reduced interest rates three times with a reduction of 0.5-1.5%/year in March, April and May 2023. The continuous adjustment of the operating interest rates is a flexible solution that is suitable to the current market conditions to support the process of economic growth recovery in accordance with the guidelines of the National Assembly and the Government. Thereby, the market's lending interest rates keep reducing, increasing the accessibility of capital for businesses and peopleso as to push economic growth.

The SBV has implemented many synchronous measures t to reduce lending interest rates. The State Bank of Vietnam has worked with commercial banks to propose further reducing interest rates to support businesses and to recover production and business in February and May.

There are still huge challenges in the context that monetary policy space is quite limit ed, so it is proposed to change from tight and cautious to cautiously loosening, supporting growth to ensure the achievement of the multilateral target policy. What is the opinion of the State Bank on this issue, sir?

Vietnam is a small economy with a very large openness, so the tools to manage interest rates, exchange rates and credit are exposed to many challenges and must be handled in a way that harmonizes many conflicting goals such as supporting thepost-pandemic economy recovery but still ensured inflation control in the context of high and persistent global prices and inflation.

The difficulty of the economy is overall but hurts enterprises and banks. If banks support businesses at an acceptable level, the economy will improve. In contrast, if the bank postpones, delays, or loosens credit conditions, the difficulties will shift to the bank, posing a risk of system insecurity.

The difficult problem here is that the SBV has to find a harmonious point to still support the economy but still ensure the safety of the banking system. In particular, in operating monetary policy, "trial and error" is not allowed. Instead, it is necessary to aim at balancing the goals, stabilizing the macro economy, controlling inflation, stabilizing the money market, and aiming at the common long-term goal of stabilizing the banking system.

From the above issues, what should be taken into consideration in the policy management orientation from now until the end of the year?

The remaining months of 2023 are forecast tobechallenging with monetary policy management. Therefore, the State Bank will continue to closely monitor economic and monetary developments at home and abroad, firmly, proactively and flexibly administer monetary policy tools to contribute to controlling inflation, supporting economic growth and stabilising the currency and foreign exchange market as well.

In particular, the State Bank will operate the open market operations flexiblyand proactively, ready to support liquidity for the credit institution system. The SBV will also regulate interest rates in line with the macro balance, inflation and monetary policy objectives; continue to encourage credit institutions to reduce costs and lower lending interest rates in order to support enterprises to recover and develop production and business.

Regarding the exchange rate, the State Bank plans to implement appropriate operations, intervene in the market when necessary, and coordinate and synchronize monetary policy measures and tools to stabilize the foreign currency market.

Thank you so much!