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It’s the right time to loosen monetary policies: expert   2008-10-22 - Dan tri

With inflation curbed and signs of a possible economic recession on the horizon, it is the right time to loosen monetary policies, says Nguyen Duc Thanh, Director of the Centre for Economic and Policy Research (CEPR) under the Hanoi Economics University, Hanoi National University.

 

SBV unexpectedly slashes basic interest rate to 13%

         

The State Bank of Vietnam has promulgated four decisions on interest rate adjustments. What is your comment about the move?

 

Nguyen Duc Thanh, Director of the Centre for Economic and Policy Research (CEPR) under the Hanoi Economics University, Hanoi National University.

This should be seen as the clearest sign of the State Bank’s intention to begin loosening the monetary policies. The first move, a very cautious one, took place on September 25, 2008, when the central bank, in Decision 2133, announced the increase in the interest rates for compulsory reserves from 3.6% to 5%, and allowed banks to use compulsory bonds (which were issued by the central bank on March 17, 2008) as collateral for loans from the central bank.

 

The latest decision, effective today, October 21, in general, aims to help improve the liquidity of banks, help reduce capital mobilisation costs and push up loaning to the national economy.

 

I think that at this moment, as inflation has shown signs of slowing down, and especially as the national economy is at risk of falling into recession (partially because of global economic recession), it is the right time to begin loosening the monetary policies, step by step.

 

I know some experts say that the central bank should only loosen the monetary policies when inflation really goes to low levels. But I think that this would be a rigid move which could cause seriously bad consequences. In fact, the big problem does not lie in the inflation rate, but in the performance of the national economy. Fighting inflation with the tightened monetary policies, in fact, is like creating a slight, artificial recession.

 

I firmly believe that beginning loosening the monetary policies now with cautious steps is a suitable move.

 

You have mentioned caution in loosening the policies. How do you think the loosening will affect inflation?

 

The State Bank of Vietnam
In principle, loosened monetary policies may lead to price increases. However, I have doubts that we are facing a recession, which means that inflation may turn into deflation. This happens because of the collapse or the decline of the system of businesses, which lead to the sharp decrease of total supply.

 

You may know that the HCM City consumer price index (CPI) was minus in October. This is a sign that shows that inflation has been curbed. However, we need to keep cautious with the inflation decrease, and try to find out if this is a sign of a deflation.

 

The move to slash interest rates may be a little contrary to the policy on fighting inflation. However, as I said before, if we keep rigid with our policies, this could cause a big collapse.

 

How will do you think the basic interest rate decrease will affect the stock market?

 

I believe this will have active impacts. It is understandable. Because the lower cost of capital can bring hopes to the enterprises that now need money to fulfill their investment plans. This will help ease the burden on businesses.

 


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