Lowering operating interest rate with lags in support of economy

The SBV's use of interest rate lowering tools future would not support much in the current context. Source: Internet

Pressure on interest rates

The FED has launched the US economy and financial market support package, including four main measures: cutting cut basic interest rates to 0-0.25%; applying a quantitative easing programme (QE) up to $700 billion through the purchase of US government bonds and securities mortgaged by housing; lowering the rediscount lending interest rate by 1.25% to 0.25% and reducing the required reserve ratio to 0% (effective from March 26, 2020); and launching a currency swap plan (SWAP) for central banks in Canada, the UK, Japan, Europe and Switzerland.

According to banking and finance experts PhD. Can Van Luc and the authors of the BIDV Training and Research Institute, this move would have many impacts on the US economy and finance and the world. In particular, it would lead to continuing to lower interest rates by central banks of countries around the world, although room to lower interest rates was not much, due to low current basic interest rates of countries, even some countries have reached negative rate as Japan and Europe’s ECB.

For Vietnam, the study showed the Fed and many central banks in the world lowered their basic interest rates in the past time, creating great pressure on reducing the operating interest rates for management agencies of Vietnam.

Therefore, in the evening of March 16, the State Bank of Vietnam (SBV) decided to reduce sharply from 0.5-1% of operating interest rates such as the refinancing rate, discount rate, OMO interest rate and overnight lending to help credit institutions have more liquidity and lower capital costs.

However, according to BIDV experts, the SBV's use of interest rate lowering tools future would not support much, due to the current short-term shocks. The things people and businesses needed were cash flow and support immediately in terms of liquidity, while the interest rate reduction lags.

Therefore, agencies should focus on solutions in the Directive 11 of Prime Minister, especially solutions to extend or postpone repayment obligations of citizens and businesses (such as fee/tax exemption and reductions, rescheduling debt and tax arrears, not transferring loan groups, making new loans at lower interest rates and increasing public investment spending).

Prioritise fiscal policy

As for VND and USD exchange rates, BIDV’s experts said a decrease in the USD interest rate would reduce the attractiveness of the USD, causing depreciation of the USD. Therefore, pressure on the USD/VND exchange rate is expected to decrease more than before, but a psychological factor may increase the exchange rate pressure, in general, it would have a negligible impact on the exchange rate.

In particular, the Fed's move would have a two-way impact on Vietnam's stock market. With more abundant liquidity, investment cash flows would seek safer markets, less affected by the Covid-19 epidemic. Therefore, Vietnam's control of the epidemic, along with drastic policy moves to support socio-economic development and improve the investment and business environment, would attract domestic and foreign investors. However, investors are also quite affected by psychology, which can cause a decline in the world and Vietnamese stock markets.

With the above comments, PhD. Can Van Luc said in this context, fiscal policy should be preferred over monetary policy, because of the immediate effect, less lags of fiscal policy. However, management agencies need to continue monitoring and harmonising monetary and fiscal policies to result in effective support.