Monetary policy needs to ensure caution and flexibility: NACFMP

Thursday, Aug 18, 2022 08:54

Dr. Nguyen Thi Mui, a member of the National Advisory Council on Financial and Monetary Policies

Recently, central banks worldwide have rushed to raise benchmark interest rates to cool rampant inflation, including the US Federal Reserves (Fed) and European Central Bank (ECB), while many others have also signaled they will raise rates this year. Vietnam News Agency spoke to Associate Professor Dr. Nguyen Thi Mui, a member of the National Advisory Council on Financial and Monetary Policies (NACFMP) about how their moves will affect the global economy, including Viet Nam.

Many experts believe the use of interest rate tools by the Fed and ECB and other regulators may slow down their economic recovery and even push them into recession. What is your opinion on this matter?

I think this statement is correct.

Using the interest rate tool can gradually lower inflation, but to a certain extent, this tool also narrows investment. This means that fewer jobs will be created, businesses do not have the environment to expand production due to the high cost of borrowing, leading to limited competitiveness of the whole economy and businesses themselves. As a result, the economic recovery will be affected.

In particular, if the high interest rate policy continues without flexibility, it sometimes backfires, causing the economy to suffer a serious recession.

How are the rate hikes by the Fed and ECB affecting global economic growth in general?

In the current context, trade and investment activities between countries are interconnected. Therefore, the tightening of monetary policy by the US and eurozone by raising interest rates will affect many other countries, especially in terms of the role and position of their currencies.

The fact that the US dollar has continuously appreciated in recent times has made the domestic currencies of many countries depreciate. This means that exporting countries whose local currencies depreciate against the US dollar will suffer but imports benefit to a certain extent. However, the level of impact is different and depends on the macroeconomic management policies of each country, including fiscal policy and monetary policy.

How will the continuous increase of basic interest rates in the US and a stronger US dollar affect Viet Nam's domestic production as well as trade?

In terms of exporting goods to the US, it is clear that when the US dollar appreciates, Vietnamese businesses will benefit, but importing businesses may be in disadvantageous position because the cost of payment in US dollars will increase, leading to higher input costs. However, the recent survey has showed this effect is not too large because the contracts are usually signed at the beginning of the year.

However, if the US dollar continues to strengthen from now until the end of the year or into 2023, Vietnamese importers will be underprivileged because 90 per cent of transactions that Vietnamese businesses, whether signing with the US or EU partners, are paid in US dollar.

Many experts fear that continuous rate hikes in the US and EU will significantly affect Viet Nam’s attraction of foreign capital. Will this be a problem?

When the US dollar strengthens, it will obviously affect foreign investment capital inflows, but the extent of this impact depends on many issues. In Viet Nam, the appreciation of the US dollar will have significant impacts on the exchange rate and interest rate which are two very important macro variables in attracting foreign investment inflow or capital outflow.

Currently, the State Bank of Viet Nam (SBV) is handling to keep the exchange rate fluctuation within the allowable range in order to create favourable conditions for import and export activities as well as to attract investment. Because, if the fluctuations are controlled within a narrow range, the capital outflow will not be large. In contrast, if the exchange rate fluctuates strongly without any control measures, it is easy to lead to capital flight. Therefore, the degree of impact of exchange rate fluctuations depends largely on the management of monetary policy of the central bank as well as macro policies.

How do you appraise the current macroeconomic management policy of the Vietnamese Government and what do you recommend to effectively deal with the undesirable effects of rate hikes by major central banks worldwide?

In my opinion, Viet Nam's macro policies have been operated in the right direction and to a certain extent, very flexible in line with the development of the domestic economy and impacts of foreign countries’ policies on the domestic economy.

The clear evidence is that while most countries in the world have implemented tight monetary policies and regulated interest rates in an upward trend, in Viet Nam, macroeconomic policies, especially the monetary policy, is being managed very flexibly. This flexibility is reflected in the fact that Viet Nam's inflation in the past seven months has remained within acceptable limits. In particular, inflation in Viet Nam in recent months has not been driven by money supply factors, but mainly by cost-push factors and supply chain disruptions.

For that reason, SBV has not employed the interest rate tool to regulate inflation. Thus, interest rates in Viet Nam have been kept at a relatively stable level to help businesses feel secure to borrow capital to expand production and business. Besides, the USD/VND exchange rate is also reasonably managed to support import-export businesses.

However, as most countries in the world are implementing tight monetary policies and high interest rates, Viet Nam always needs to be watchful and prepare specific scenarios to cope with the changes.

When other countries maintain tight monetary policies, Viet Nam cannot loosen its policy but must base on the state of the domestic economy, its economic goals to manage the macro policies, including monetary policy, in the direction of ensuring flexibility but still caution. How to tighten so that the economy can still recover and develop is the art of managing macro policy of the State Bank of Viet Nam. — VNS

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