August 27, 2019 09:01

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'Buffer zones' for monetary policy

14:37 | 25/08/2019

VCN- Global financial markets over the past few days have been staggered because of many unexpected developments stemming from conflicts and policy decisions of large countries. Although it may be affected, the domestic market can be assured because monetary policy is being supported by safe "buffer zones".

tin nhap 20190821150641 Exchange rate won’t fluctuate strongly
tin nhap 20190821150641 Exchange rates under less pressure, no sharp fluctuations
tin nhap 20190821150641 Central bank to continue managing monetary policy
tin nhap 20190821150641
The foreign currency and gold markets in the country will be more or less affected, but should not be too worried. Photo: Internet

Records are "broken-down"

On the first day of August (Vietnam time), the market started to wake up when the US Federal Reserve (Fed) announced it would lower the basic interest rate for the first time in more than 10 years, down to the range of 2-2.25%. This decision immediately caused the USD price index in the world market to rise sharply, up to the highest level in more than 2 years.

Only a day later, US President Donald Trump announced a 10% tax rate on a total value of 300 billion USD of Chinese goods from September 1. This statement immediately caused the US index to plummet, and the gold price soared, now it is exceeding the level of 1,500 USD / ounce - earlier than expected by many domestic and international experts. Especially, in recent days, the financial market is more turbulent when the exchange rate between CNY and USD has surpassed the psychological resistance of 7 CNY to 1 USD.

It can be seen that the monetary market in Vietnam has been affected by these developments. Thus, the price of USD and domestic gold also fluctuated according to the world market price. The State Bank of Vietnam (SBV) raised the central exchange rate, so on August 8, the central rate increased to 23,117 VND / USD - the highest level. However, the good news is that the USD price in commercial banks has increased and decreased slightly, holding the necessary stability.

But the most shocking situation in the domestic monetary market is the gold price. In just over a week from August 5 to August 9, gold price has increased by nearly VND 2 million/tael, soaring above VND 42.5 million/tael- the highest in over 6 years. Soon after, on August 12, gold prices started falling. At 14:30 on August 14, the domestic gold price was listed by Doji Gold and Silver Group at VND 41.320 million/tael (to buy) and VND 41.770 million/tael (sold). Saigon Jewelry Company listed SJC gold at VND41.250 million/tael (to buy) and VND 42.620 million/tael (sold).

According to Mr Pham Hai Au, Vice Chairman of Phu Quy Jewelry Group, recently gold prices have increased, mainly because the US lowered the USD interest rate and the development of the US-China trade war when two the parties are retaliating against each other. In addition, political instability in some countries has escalated and many central banks are also floating currencies that have made investors seek gold as sheltersof safe assets.

Vietnam does not float its currency

Before the developments of the world financial market, financial and banking expert Dr. Can Van Luc said that the Vietnamese dong will has been impacted but not much, but the problem of domestic exchange rate from now to the end of the year will be more risky. However, considering the macroeconomic context of Vietnam, it is possible to see a lot of safe areas and "buffer zones" to ensure monetary policy.

Accordingly, in July, disbursed FDI inflows reached $1.45 billion and trade was about $200 million. Although not as positive as in June, in the first 7 months of 2019, total disbursed FDI was $10.55 billion, up 7.1% over the same period last year and the trade surplus was $2.06 billion. In addition, successful sales and international issuance transactions have helped increase the supply of foreign currency during the month. As a result, the experts of SSI Securities Company commented that though the USD price has risen strongly in the international market, VND is one of the few currencies that did not increase in the past month.

Moreover, thanks to the falling exchange rate, a part of accumulated foreign currency from June was sold to the SBV, helping to increase foreign exchange reserves. Thus, SBV Governor Le Minh Hung affirmed that the SBV has bought a large amount of foreign currency, bringing the total reserves to the highest level. The SBV has adequate foreign exchange reserves and tools to ensure the general balance of the economy.

Regarding the price of gold, despite a strong increase, the domestic gold market is still "quiet", there are no crowds queuing up to buy gold as before, although the gold price is expected to increase. Economic experts said that the unpredictable changes in gold prices made investors "frustrated", making them unable to find safety and profitability. In particular, Dr. Can Van Luc added that the gold market has now been tightly controlled by State agencies, helping the domestic gold price be more stable than the world gold price.

The rate of inflation in Vietnam currently is very low, always maintained at less than 4%, that also makes gold or foreign currency not attractive as a"shelter"for people. Therefore, another safe "buffer zone" for monetary policy is the interest rate - the output and input interest rates have been and will be kept stable. Currently, the input interest rate is still maintained at an"attractive" level for depositors. Especially, since the end of 2015, although the Fed continuously raised interest rates, the SBV interest rate and open market interest rates (OMO) remained stable, experts said.This showed monetary policy of Vietnam is operated quite flexibly, not rigid in a way that is tightening or loosening, but aiming at stabilizing the currency, cautiously regulating the cash flow.

It can be seen that the monetary policy in Vietnam is being operated flexibly by the State Bank but Dr. Can Van Luc said that we must monitor and evaluate closely, not devalue the VND, because if the VND is reduced too deeply (more than 3%), it can lead to risks, especially if the US puts Vietnam on the list of currency manipulation. Therefore, Vietnam should prioritize solutions to stabilize macro economy, curb inflation, strengthen foreign currency reserves and gold reserves to increase economic internal strength and create safe "buffer zones” and resist outside “waves”.

By Huong Diu/Quynh Lan