According to analysts, when the economy has a high inflation rate, increasing interest rates (including basic interest rates from the central bank, mobilising interest rates and lending interest rates from commercial banks) and tightening foreign currency credit will help to curb inflation in many countries in the world.

The regulation from the State Bank of Vietnam (SBV) for a basic interest rate of 14 percent per year is a good signal to attract more money out of circulation and slow down the hot credit growth.

High interest rates – “a double-edged knife”

Increasing interest rates is a necessary measure in the short-term to curb the inflation rate, limit credit growth and encourage people to deposit their money in the banks. When inflation is under control, it is a must for banks to adjust interest rates and other indirect tools properly.

Dr Nguyen Minh Phong

Sharing this view, Dr Nguyen Thi Mui, deputy director from the Financial Institute said

Ms Nguyen Thi Mui

that the price hike in goods in recent times has affected most low-income earners but not had a great impact on high income earners who still spend their money on buying cars, luxury apartments, villas and on beauty services. Meanwhile, most of Vietnamese enterprises are small and medium sized and operate with loans from the banks. High interest rates make enterprises find it difficult to take out loans to ensure their production activities and small and medium-sized enterprises (SMEs) provide most of the essential goods used by the public.

How to adjust monetary polices?

Curbing inflation has initially shown positive signs but there remain unstable signs for the macro economy. Although the import surplus is now less compared to previous months, it remains at a high level while many enterprises have a shortage of capital for their production activities. Dr Mui affirmed that in the remaining months of this year, credit and interest rates at the SBV should be adjusted properly to control inflation, facilitate economic development and help to stabilise the macro economy.

Mr Le Xuan Nghia

So far, many have said that it is necessary to increase basic interest rates to encourage enterprises and people to deposit their money in VND in banks to curb inflation. Dr Mui added that this might be true for some countries but in Vietnam, it is a different scenario. In recent times, although interest rates have gone up, the volume of capital mobilized by the banks has not increased remarkably as many people’s incomes remain low. Meanwhile, many people think a continuous increase in interest rates means that the VND has been devaluating and they decide to withdraw their money from banks to invest in gold, dollars and other valuable assets.

As a result, keeping deposit and lending interest rates high leads to a decrease in individual investment, raises the borrowing costs and blunts the national economy’s competitive edge. If the situation is prolonged, the economy will become worse. Mr Mui said once increasing interest rates proves ineffective, a downward trend should be followed in the remaining months of this year.