On Monday, the State Bank of Viet Nam (SBV) began applying a daily-adjusted "central rate" instead of maintaining a fixed reference rate for a long period of time. This was the first time the central bank had done so and Le Duc Tho, General Director of the Viet Nam Bank for Industry and Trade (VietinBank), talked to Vietnam News Agency reporter Thuy Ha about the change.

What is the difference between the new central rate and the old one?

Le Duc Tho

The central rate is defined based on three factors: average exchange rate moves in the inter-bank foreign currency market; exchange rate developments related to the currencies of countries that are involved in Viet Nam's trade, investment and financing to a major extent; and macroeconomic balances and the goals of monetary policies. The fluctuations of one or all these elements will affect everyday operations of the central rate.

Formerly, when we used an average inter-bank rate which stayed relatively stable during a period of time, the pressure on the rate was heavy in times of [monetary] tension. Now the daily adjustments will enable the rate to flexibly move following global market developments, while guaranteeing needed stability for healthy and sustained market development in Viet Nam.

How will the new exchange rate operation method help the market?

With the current mechanism, enterprises, credit institutions and people will be much more active in deciding the time to carry out business activities related to foreign currencies. Market members will also be stimulated to more widely apply financing derivatives, including foreign currency futures. This is a good practice in international markets, especially in finance and commodity segments. We believe that the new method will help the local financial market integrate more rapidly into the global ones.

Assuming that the SBV sets a central rate that does not match the demand of businesses and people, then what will happen?

Calculated the current way, the central rate already reflects supply and demand in both domestic and international markets. However, how much it is adjusted will depend on the aims of monetary policies. The central bank must decide on this so that the rate can track developments in the foreign currency market, while not creating any shock for the economy. It is also to define rates that help exporters best compete in international goods and service markets. We believe that the new rate mechanism will help export companies enhance their competitiveness, with less risks, in a context that the country witnesses deeper integration and its trade partners also run flexible exchange rates.

Can the new mechanism settle the issue of exchange rates seeing tension now and then?

From the angle of a commercial bank, we saw very positive psychology in the market about the mechanism from the first day it was applied. In fact, foreign currency transactions are smooth with good liquidity, with exchange rates fluctuating within the trading bands regulated by the SBV. — VNS