With the gradual increase of dong interest rates in recent time as well as the unstoppable move on interest rate increase by the United States Federal Reserve (Fed), many people suppose that the State Bank should consider raising deposit rates in US dollars, instead of the current zero percent.
Regarding this, finance and banking expert Huynh Buu Son said it is true that the deposit rate in US dollar at zero percent now is no longer attractive with the idle source of money in US dollar. Meanwhile, Fed has reincreased interest rates and has had a roadmap to continue raising the rates in the near future. Therefore, Vietnam’s interest rate of foreign currency deposits should also follow Fed’s moves.
However, according to Son, dong is not a convertible currency, so it is not necessary to maintain savings rates in US dollar at high level, especially when the anti-dollarisation policy of the economy is being strengthened.
With the question of Phu Yen voters about US dollar deposit rate at zero percent, State Bank Governor Le Minh Hung answered at the Official Letter No.1303/NHNN-VP dated March 5, 2018.
Accordingly, earlier, due to the fact that inflation was always high, Vietnam’s dollarisation situation was also at alarming level. The amount of foreign currency deposits compared to the total money supply in 2007-2011 was more than 20 percent. The phenomenon of buying, selling, paying and hoarding foreign currency in cash was rather popular; the exchange rate difference between official and unofficial markets was high, putting large pressure on the official exchange rate market and largely affecting the State Bank’s exchange rate and monetary regulation. The instability of exchange rate and foreign exchange market in this period was one of the reasons leading to the instability of the macro economy.
In that situation, the State Bank issued a synchronous solution package to stabilise foreign exchange market, controlling exchange rate expectation and enhancing the position of dong, including the deposit rate ceiling policy at zero percent.
A noticeable thing is that after applying US dollar deposit rate policy at zero percent per annum, exchange rate fluctuations and foreign currency market have been stable, the psychology of foreign currency hoarding has decreased, the system of credit organisations has shifted from net selling to net buying foreign currencies since 2016, facilitating the State Bank to purchase a large volume of foreign currencies to supplement to the state’s foreign currency reserves.
*Exchange rate is hard to fluctuate even when Fed continues to raise interest rates
Fed said there will have a total of three interest rate hikes in 2018. However, this is expected to change at the meeting of the Federal Open Market Committee in June 2018.
Though Fed has issued a message to continue raising interest rates in the near future, according to financial expert Huynh Trung Minh, that will not cause exchange rate to fluctuate. In fact, over the last period, dong exchange rate has been controlled stably, so for the rest of 2018, exchange rate is hard to fluctuate much, even when Fed continues implementing the interest rate increase roadmap. The reasons are foreign currency reserves increase, remittances increase, foreign direct and indirect investment continue flowing into Vietnam.
According to the statistics of the State Bank, as of the end of April 2018, Vietnam’s foreign currency reserves reached nearly $63 billion, the highest level ever. Remittances in 2017 touched $9.84 billion, up 10.76 percent compared to 2016; the disbursement of foreign direct investment continued with positive trend, of which, disbursed FDI hit $17.5 billion.
The State Bank supposes that to attract investment in production and business, the stabilisation of macro economy and value of dong play important role. When dong stabilises, the macro economy is stable, of course, the demand for asset provisioning in gold and foreign currencies will decrease and investment demand will increase.
The State Bank has actively and flexibly regulated monetary policy with the target of controlling inflation, stabilising macro economy and helping to raise the position of dong, and strengthening the confidence of the people in dong.
