Is there a clear difference between interest rates and inflation?

In operating the financial system, monetary policy and fiscal policy are aligned.


Recently, before the inflation tends to decrease, the State Bank has adjusted the reduction in operating rates and lending interest rates in some priority areas. But according to TS. Nguyen Duc Do, deputy director of the Institute of Financial Economics and Finance, said that monetary policy should be ahead of inflation.

Lowering interest rates is always a simple matter of the banking industry, why is that, sir?
Currently, lowering interest rates is the demand of the economy, because GDP growth in the first 6 months was not as expected. Recently, SBV has instructed to lower lending interest rates for some priority sectors. But lowering lending rates is not easy, as the gap between the lending and deposit rates (NIM) of the banking system is low. According to the World Bank (WB), the average lending interest rate in Vietnam in 2016 is 7%, while the average deposit rate is 5%, ie NIM is only 2%. If you want commercial banks to lower interest rates, then lower interest rates to mobilize.

In recent years, when the inflation rate has dropped, the mobilizing interest rate has been lower but at a slower rate, the SBV needs to support the money supply to the economy so that banks have more capital. However, the support from the SBV in traditional ways such as buying USD, government bonds, lowering management interest rates will mainly affect the short-term interest rates, which can not completely replace long-term deposits. . That is not to mention interest rates are also affected by bad debt.

What do you think about the risks of the current inflation in Vietnam?
Inflation has many measures in which the CPI is most commonly used. However, in the past time this indicator in Vietnam is disturbed by the adjustment of health and education services. Therefore, using a basic inflation measure will more accurately reflect the trend of inflation. This will eliminate factors or fluctuations such as oil prices, food prices, food ... only the most stable factors, reflecting the trend of inflation better than overall inflation.

According to this measure, inflation is currently 1.52% on average, while the same period is 1.29%, which is low and is on the downward trend, by the end of the year can be asymptotical first%. However, if the overall inflation is used, the current average is about 4.15%, the probability of reaching the end of the year will be less than 4%, but that is not the level is considered low.

The experience of many countries suggests that monetary policy should be based on core inflation (similar to basic inflation in Vietnam), since if monetary policy relies on overall inflation, Regular up and down along with oil prices, food and food prices and will not bring stability to the economy.

According to him, how will the impact of inflation and interest rates on the economy affect?
In a market economy, stabilizing inflation, interest rates and exchange rates at a reasonable level is one of the prerequisites for ensuring national financial and monetary security, especially in countries with high levels. High economic opening like Vietnam. The fluctuation of these factors has a decisive impact not only on the revenue, cost and profitability of the enterprises, but also on the revenue and repayment capacity of the state budget.

From 2012 until now both inflation and interest rates in Vietnam are on the downward trend. However, due to various reasons, including issues related to exchange rates, budget deficits and especially high levels of non-performing loans, the rate of decline has been slower than the rate The reduction of inflation, ie, certain phase deviations.

According to statistics, the nominal interest rate in Vietnam is currently only about 40% compared to 2011. But if using basic inflation or GDP as a measure (these measures do not tolerate The impact of the adjustment of the prices of health services and education by administrative measures), the current inflation rate is only around 10% compared to 2011. This has caused the real interest rate (interest rate after Minus inflation) in Vietnam has increased rapidly since 2012.

High interest rates while the debt of enterprises and the Government will be relatively large will affect the ability to repay; High interest rates also make the number of projects less feasible, slowing investment, resulting in reduced economic growth rates.

For Vietnam, an average lending rate of 6% per annum along with basic inflation or GDP inflation at 2% would be more reasonable than when the lending rate was 7% per annum and inflation Is 1% as is. The basic inflation rate of around 1% is quite low. Not to mention the risk of inflation to 0% can not be ignored, because then Vietnam may fall into the deflation trap: low inflation causing high real interest rates - high real interest rate makes inflation low.

With this phenomenon of phase out, how monetary policy and fiscal policy need to operate, sir?
Monetary policy, which is here the interest rate, should precede inflation to lower real interest rates, the real interest rate reduction will have an impact on the economy. If monetary policy goes ahead, waiting for inflation to fall by 1% and then lowering interest rates by 1%, real interest rates will not change, so reducing interest rates has no impact on economic growth. For example, the lending rate in Vietnam is now 7% per year, inflation is 1%, lower interest rates to 6% per year, the real interest rate is 5%; But if you wait for inflation to fall to 0% to lower interest rates to 6% per year, the real interest rate is still 6%.

The experience of many countries in the world shows that monetary policy always has a lag, so we need to act in advance based on the forecasts. Of course, monetary policymaking in this way is also risky that the forecasts may be inaccurate.

As for the coordination between monetary policy and fiscal policy, it can be said that the coordination in the past has been relatively good, especially in the issuance of government bonds. Lowering interest rates will not only make it easier to issue government bonds as planned, but also to reduce the burden of repaying the state budget. In addition, when lowering interest rates stimulates economic growth, state budget revenues will also be less stressful.

Thank you Sir!


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