The Vietnamese central bank's benchmark interest rate has "lost much of its monetary policy relevance" and a new instrument is needed to control lending and inflation, Australia & New Zealand Banking Group Ltd. said.
The State Bank of Vietnam has this year eliminated links between market interest rates and the benchmark, known as the base rate. The previous links capped lending rates at 1.5-times the benchmark, which has held at 8 percent since December.
The previous link meant that changes in the base rate had a direct bearing on credit demand and activity, wrote Paul Gruenwald, the Singapore-based chief Asia economist for ANZ. The current situation creates uncertainty over the central bank's policy, he said in a research note dated Monday.
"Now that the link between the base rate and lending rates has been severed, the authorities should try to make their monetary policy regime clear," Gruenwald said in a telephone interview Tuesday from Singapore.
"If they're trying to control credit growth and prices they need a monetary policy instrument to do that, and now it's not clear what the instrument is," he said. "Having market- based rates is positive, but you still need to have a transparent method of influencing those rates."
The removal of the link meant that some lending rates had "whiplashed" to as high as 18 percent from 12 percent, before retreating and stabilizing at about 14 percent, HSBC Holdings Plc said in a note dated April 30. Overall loan growth in the first quarter was 3 percent, compared with a 25 percent full- year target.
"The liberalization of interest rates led to an unanticipated over-tightening of monetary conditions," Gruenwald wrote in the research. "With the State Bank of Vietnam base rate no longer tied to lending rates, the latter can fall only through slower growth and credit demand, lower inflation expectations, or "˜window guidance.'"
The tightening of monetary policy through the removal of interest-rate caps has eased pressure for a further depreciation of the Vietnamese dong against the dollar, wrote Tamara Henderson, the head of foreign exchange research for Asia for ANZ, in research also dated Monday.
"Inflation momentum has already begun to slow ahead of more favorable base effects later in the year, which should help to at least stabilize, if not ultimately reduce, the demand for dollars onshore," wrote Henderson, who's also based in Singapore. "Meanwhile, foreign equity inflows have picked up markedly."
The dong will probably trade at about 19,000 per dollar for the rest of the year, predicted Henderson.
"Nevertheless, significant risks remain for a further devaluation once global demand starts to normalize next year, assuming the authorities maintain a bias in favor of growth," Henderson wrote.