Macroeconomics Presentation Topic: Monetary Policy and Inflation Control in Vietnam

Monetary policy is the process by which the monetary authority of a country controls the supply of money, often targeting a rate of interest for the purpose of promoting economic growth and stability. The official goals usually include relatively stable prices and low unemployment. Monetary economics provides insight into how to craft optimal monetary policy.Monetary policy is referred to as either being expansionary or contractionary, where an expansionary policy increases the total supply of money in the economy more rapidly than usual, and contractionary policy expands the money supply more slowly than usual or even shrinks it. Expansionary policy is traditionally used to try to combat unemployment in a recession by lowering interest rates in the hope that easy credit will entice businesses into expanding. Contractionary policy is intended to slow inflation in order to avoid the resulting distortions and deterioration of asset values.

Monetary Policy & Inflation

Control in Vietnam

Macroeconomics Presentation

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1 Monetary policy of Viet Nam

1.1 Legal framework:

Based on the SBV Law, monetary

policy is largely the responsibility of

the National Assembly and the

government, and the SBV is an

integrated part of Vietnamese

government The National Assembly, together with the government, sets

monetary policy objectives and the

stance of monetary policy

I Overview

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1 Monetary policy of Viet Nam

1.2 Goal:

Resolution 11(24/2/2011): control

inflation, stabilized macroeconomic with

6 packages of policy

 Tightening monetary policy

 Constraint trade deficit

 Increased electricity prices

 Use provide a mechanism for the

market over the pricing of gasoline

 Strengthen social security

 Improve the efficiency of information dissemination policy 4

 In 2012, the State Bank have the appropriate policies to encourage credit institutions to provide preferential loans in this area.

 Central bank monetary policy operating closely and carefully to achieve the objective of controlling credit growth, the total liquidity low payment, interest rate and exchange rate at reasonable levels contribute to curb inflation, stabilize macro-economy and ensure social security.

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2 Inflation – Figure and

fact

Inflation rate in some recent years

global financial crisis started)

Inflation – Figure and fact

2007 2008 2009 2010 2011 0.00%

Inflation – Figure and fact

CPI in some recent years

 Year 2006: 6.6%

global financial crisis started)

 Year 2009: 6.8%

The inflation rate in Vietnam was last

reported at 14 percent in March of 2012

Discount rate • Discount rate

Required reserves

 The SBV has been using required reserves in

various forms since the 1990s, and changes of

reserve requirements for deposits have been

considered as an important instrument of

monetary policy in the past

 Reserve requirements are differentiated according

to the maturity of deposits, the sectoral focus of banks, and whether it is a domestic or foreign

11% (11/04/2012) 693/QD-NHNN

10/4/2012

Open market operation

 Open market operations take the form of

outright sales and purchases of securities or repurchase agreements The purchase or sale

of securities may take place in the form of

auctions by volume or auction for interest rate.

 Securities eligible for open market

transactions are primarily government

securities, State Bank bills or securities that have been selected by the SBV

 Currently, auctions take place three times a week, and in 2004 the SBV launched a web-

based auction system.

Interventions in the foreign exchange market

instruments to strengthen the economy’s

overall competitiveness, increase aggregate productivity, maintain external balance,

contain inflation and stabilize asset markets” (Frenkel and Taylor 2005)

While indirect monetary policy has been introduced, there appears to exist a strong belief in the

government and the State Bank of Vietnam that indirect monetary

policy instruments are not

sufficient to control inflation and

that other measures than indirect monetary policy need to be used.

Direct measurements

1)Reference rate for interest rates of banks:

1.1 Base interest rate has been to provide a

“basis for the determination by credit

institutions of the lending interest rate in

III How Vietnam used Monetary Policy to control Inflation

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 On 17/5/2011, SBV rose OMO Interest rate from 13% to 15% per year.

 On 1/6/2011, Reserve requirement

ratio for commercial banks (except

Agribank) increased from 6% to 7%.

 On 3/8/2011, SBV increased Discount rate from 7% to 12%, then increased

to 13% on 1/5/2011.

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Increase in OMO Interest

rate and Discount rate by

MS Deceases

Interest Rate Increases

C&I decreases

AD decreases

Real GDP decreases

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James Riedel and William S Turley “The politics and economics of tran- sition to an open market economy

in Vietnam,” OECD Working Paper No 152, September 1999

Central Bank News, 2011 Monetary Policy Week in Review – 21 May 2011 Available at:

http://www.centralbanknews.info/2011/05/monetary-policy-week-in-review-21-may.html Accessed 13May 2012

Bao moi, 2012 Vietnam successful in implementing tight monetary policy Available at:

http://en.baomoi.com/Info/Vietnam-successful-in-implementing-tight-monetary-policy/5/261459.epi Accessed 13 May 2012

Dan tri, 2011 Ngan hang nha nuoc se lam gi nam 2012 Available at:

http://dantri.com.vn/c76/s76-559026/ngan-hang-nha-nuoc-se-lam-gi-trong-nam-2012.htm Accessed 14 May 2012

Dan tri, 2011 Lai suat thi truong mo len 15% nam Available at:

http://dantri.com.vn/c76/s76-481970/tang-lai-suat-thi-truong-mo-len-15nam.htm Accessed 14 May 2012

Vietnam Economy, 2011 Tiep tuc tang ty le du tru bat buoc bang ngoai te Available at:

http://vneconomy.vn/2011060111395221P0C6/tiep-tuc-tang-ty-le-du-tru-bat-buoc-bang-ngoai-te.htm

Accessed 14 May 2012.

Vietnam Economy, 2011 3 lan khung hoang va 3 lan chuyen vi the cua Viet Nam Available at:

http://vneconomy.vn/20105194034740P0C9920/3-lan-khung-hoang-va-3-lan-chuyen-vi-the-cua-viet-nam.htm Accessed 14 May 2012

Bao moi, 2008 Nhap sieu nam 2008 la 17 ty USD Available at:

http://www.baomoi.com/Nhap-sieu-nam-2008-la-17-ty-USD/50/3061585.epi Accessed 13 May 2012.

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