State Bank’ rate hike necessary to defend VN dong, control inflation: ADB Country Director

ADB Country Director Andrew Jeffries has talked to the Vietnam News Agency on the recent interest rate hike by the State Bank of Vietnam in the context of the Fed, ECB and a number of countries raising their rates to curb inflation.
State Bank’ rate hike necessary to defend VN dong, control inflation: ADB Country Director ảnh 1ADB Country Director Andrew Jeffries (Photo: VNA)
Hanoi (VNA) – ADB Country Director Andrew Jeffrieshas talked to the Vietnam News Agency on the recent interest rate hike by the StateBank of Vietnam in the context of the Fed, ECBand a number of countries raising their ratesto curb inflation.  

“Another significant achievement in economic policy in Vietnam has beenmaintaining macro-economic stability,” Jeffries said.

According to him, through the pandemic andalso through the economic shocks of this year, including global inflation,fallout from the conflict in Ukraine and recessionrisks, Vietnam was successful in controlling inflation this year, despiteenormous pressure from energy, commodity price surges from world economy.

He went on to say that monetary policy measures taken by the government have greatlycontributed to this success, keeping money supply and credit under control,dealing with pressure for a stable exchange rate while supporting business accessto financial resources for recovery.

“This is avery delicate balancing act and the State Bank of Vietnam should be given goodcredit for this,” the ADB official said.

As for the risk of capital outflows following rate hikes by central banks inthe world, Jeffries was of the view that Vietnam is relatively less affected than many othercountries in Asia.

He explained that first of all, Vietnam does not have significant governmentdebt in the international bond markets and has relatively low public debt level,at 43% of GDP. Capital control restricts overseas portfolio investment or hotmoney for rapid inflows and outflows from Vietnam stock market.

According to him, the US Fed’s aggressive monetary tightening will triggershort term capital outflows, however foreign direct investment or FDI remains healthy in Vietnam due to the country’s solid medium term economic fundamentals.

He stressed that it’s very important to consider that FDI is long term, itdoesn’t come and go and flee based on economic shocks. And Vietnam has strongeconomic fundamentals and will remain an attractive FDI destination.

State Bank’ rate hike necessary to defend VN dong, control inflation: ADB Country Director ảnh 2The State Bank of Vietnam has revised several interest rates by 1% starting from September 23.(Photo: VNA)
Jeffries said the one percentage point increase in rate on September 22 inVietnam is an example of decisive measures that are necessary in thisenvironment where the Fed, ECB and a number of countries have very recentlyraised rates, with Vietnam following suit to keep the dong stable and it wasdifficult but the right thing to do.

A stableVietnamese dong is critical for Vietnam to support trade and also containinflation, he said, noting that depreciation of the dong would make importedgoods more expensive and would worsen the account balance and eventually thebalance of payment.

Vietnam also imports a lot of intermediate goods and does final re-assembly forre-export and so a stable dong is important to maintain relatively lower pricesfor these important imports that are critical input for Vietnam for the export,according to Jeffries.

He noted that the high inflation in major economies and the tightening monetarypolicy around the world is weakening global demand. Vietnam is an open economy,means that this trend could wear on Vietnam’s export.

Another issueis possible labour shortages, which could impede the recovery of services inlabour intensive export sector.

“So recommendations include Vietnam should continue to maintain a flexiblemonetary policy, and closely monitor the global economic situation. The aggressiverate hike that the State Bank of Vietnam just implemented is a decisive actionin a reaction to the extremely volatile global situation, meant to defend thedong and keep inflation in check,” the ADB Country Director said.

He added thattargeted fiscal support for the most vulnerable group may be needed ifinflation does raise. Before this rate increase, the State Bank of Vietnam was usingcredit room limit to address the problem which is imposing a ceiling on creditquantity to financial institutions.

This workedbut as shown just in the last few days, it’s time to move on to more market-based instruments such as increasing rates to promote a healthy financial sectordevelopment for longer terms, according to Jeffries.

He said regardingthe fiscal side, Vietnam’s economic recovery development programme has a lot ofinteresting and innovative features to help companies and businesses recoverfrom the pandemic and the current shocks. Implementation needs to be sped upand again target those in need rather be too broad to avoid a limit and abusesof the problem.

In his view, in a longer term, the priority should focus on improving theoverall business environment which has come a long way but that’s an on-goinggradual and continuous process that needs to keep going.

He recommendedsuch measures as removing hurdle for businesses and simplifying administrativeprocedures to lower transaction cost.

The ADB CountryDirector said the good news is Vietnam growth this year is very strong, withthe ADB projecting 6.5% while other projected even higher, and so despite therisk going on globally, the strong fundamentals of Vietnam make Vietnamrelatively resilient in a more challenging global environment./. 
VNA

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