The driving force for the economy

Core inflation in May and the first five months of 2021 are both the lowest levels in the past five years

Inflation variable

2021 is not a simple year in dealing with the management of monetary policy.

According to economic expert, Dr. Vo Tri Thanh, the Covid-19 pandemic is still complicated, with the 3rd outbreak at the beginning of the year and the 4th outbreak at the end of April.

This has had a strong impact on businesses, thereby affecting the banking industry with the fear of increasing bad debt. Besides, inflation pressure in 2021 is expected to be greater than in 2020, if the monetary policy loosens too much, it will increase financial risks and put pressure on inflation, but if tightened, it will have an impact on economic recovery.

However, the reality in the past six months has shown that the management of monetary policy is very favorable and there have been significant highlights to support the economy.

Statistics from the General Statistics Office show that the average core inflation in the first five months of 2021 increased by 2.9% over the same period in 2020. Core inflation in May and the first five months of 2021 are both at the lowest level in the last five years.

Moreover, the fact that many central banks continue to operate loose monetary policies, accompanied by an abundant supply of foreign currency from remittances, trade surplus and disbursement of foreign capital also helps the value of Vietnam's dong remain stable, the exchange rate with foreign currencies remained "flat" for most of the time, strongly supporting domestic import and export activities.

In particular, thanks to the stable exchange rate, the price movements of precious metals, including gold, are also quite stable. Although the domestic gold price is still "shining" at a high price range, there have not been strong gains, causing a "shock" to the market.

According to the assessment of Dr. Can Van Luc and the authors of the BIDV Training and Research Institute, one of the factors to reduce inflation pressure in Vietnam is that up to now, Vietnam's major balances are in a better state.

Compared with the previous period, the relationship between supply and demand for foreign currencies is quite stable, the gold market is better controlled.

Since the beginning of the year, the VND has increased slightly (0.22% against the USD), so the exchange rate for the whole year is forecast to increase by about 0.5-1%. Moreover, monetary policy, fiscal policy and price are becoming more and more in tune, clearly showing the coordination in the issuance of Government bonds.

Interest rate highlights

The most notable highlight of the monetary policy is that the operating interest rate toolkit continues to be maintained by the State Bank of Vietnam (SBV) compared to the end of 2020, including the ceiling deposit and lending rates, the lending rates to commercial banks on the open market or through the discount window. Maintaining stable operating interest rates in the context of complicated pandemic developments has helped increase aggregate demand, contributing to the recovery of economic growth.

Moreover, although interbank interest rates increased slightly in May and June, they remained low, showing that liquidity at banks is abundant, thereby increasing the ability to push capital outflows into the economy.

Surveys at banks show that lending interest rates are still stable compared to the end of 2020. Credit growth is therefore much better than the same period in 2020.

According to analysis by Securities Company Rong Viet Securities (VDSC), the State Bank is choosing a "carrot and stick" approach to credit risk management. As a result, banks will be motivated to improve their operations and be more cautious in risky and speculative lending activities.

However, although maintaining low interest rates will create more room to reduce lending rates, it will create many concerns about cash flow into risky areas, including the unlicensed financial sector in Vietnam such as digital currency, foreign exchange (forex) exchange.

The proof is that the stock market has welcomed a large number of F0 investors, or the fever of the real estate market at the beginning of the year. Therefore, risks for the money market are always present, so choosing investment channels will be very difficult in the remaining months of the year.

Fiscal-monetary “resonance”

In the context of intertwined challenges and opportunities, Government leaders have directed the Ministry of Finance and the State Bank of Vietnam according to their assigned functions and tasks to continue to closely coordinate and implement flexible fiscal and monetary policies, ensuring consistent implementation of the goal of macroeconomic stability, controlling inflation and supporting production and business, while promoting economic growth. At the same time, the State Bank should continue to direct credit institutions to minimize costs, continue to reduce lending interest rates to contribute to solving difficulties for businesses; ensure the safety of credit and banking activities.

For economic recovery, it is necessary to have "resonance" of both monetary policy and fiscal solutions. According to Pham Thanh Ha, Director of the Monetary Policy Department (SBV), the coordination between the SBV and the Ministry of Finance has been implemented synchronously and closely to successfully carry out the tasks assigned by the National Assembly, the Government and the Prime Minister, thereby supporting to control inflation below 4%, stabilize the macro-economy, and strengthen the resilience of the economy to adverse shocks.

Also on this issue, Dr. Can Van Luc and a group of authors from the BIDV Training and Research Institute believe that it is necessary to further improve efficiency in monetary and fiscal policy coordination; focus on effectively implementing fiscal and monetary support solutions to be correct, successful and effective; strengthen the coordination of dosage and timing of market regulation, especially the bond market; continue to strengthen the corporate bond market, thereby reducing pressure on credit capital, diversifying channels of mobilization and distribution of capital in the economy.

The above issues show that in the last months of the year, it is necessary for monetary policy to continue to be proactive, flexible and harmoniously coordinated with other macroeconomic policies. Because stable currency will be the premise and motivation for economic targets to be completed, helping to stabilize import and export activities and businesses.