Monetary policy of Central Bank of VN and effects

In VN, Central Bank is named The State Bank and the governor is selected by the Government.

In the attempt to control the race on interest rate of financial institutions, CB hired a bunch of policies.

• On September 2010, CB regulated the AER (Annual Equivalent Rate) ceiling at 14%, apply to deposit which is longer than 1 month. However, this policy was not applied successively, because of the relation between demand – supply in the real world. Demand was much higher than supply pushed the race in AER go beyond the control of a single policy. In fact, there were commercial banks which evaded by secretly offering depositor an “award” computed on the deposit, raise the real rate to 17-18%. My case is a real story. When I applied for the UK Visa, it required a deposit account of £20,000. My mom asked several banks while she went jogging in the street. Surprisingly, she was offer a 3% “award interest” by a small bank (its capital is 3000 billion VND – around £85,700,000), and the award was prepaid. It should be noticed that CB did not regulate APR (Annual Percentage Rate). This means AER ceiling would decrease the growth of credit and therefore decrease the volume of loans while the APR was free to fly. Depends on demand and risk aversion of borrower, banks would flexibly apply various interest rate. Commercial banks often chase after profit, easily lend to borrowers who invest in real estate and stock market at a high rate, and forget who really create value for development, may result in an unstable economy and contribute in creating bubbles.

• Regulated the level of reserve requirement on April 2011, to 7% and continuously went up by 1% on September 2011. This policy can be considered as a tool to control the high inflation (CPI on first quarter of 2011 increased by 6.17%, in 2010 the ratio was 11.75%, according to GeneralStatistics Office of VN). A rise in reserve can significantly decline the amount of money which had been pumped into the market in the great celebration 1000^th years of Hanoi. It could lead to an increase in APR due to the supply decreased. Once again, firms who actually need for funds to produce could not approach the high interest rate.

As on lecture, open market operations is a pretty effective tool of CB, it seems that CB of Vietnam had not exploited the potential of this policy. It also indicates that policies of CB are sometimes not based on the real world and they are just immediate reaction.