The tools of monetary policy can be classified into interest rate policy, reserve policy, lending operations, asset purchase programs and foreign exchange intervention. The central objective of central bank monetary policy in emerging markets is to ease financial conditions to allow credit to reach struggling firms, rather than boost aggregate demand. Without credit and timely liquidity, many businesses will not be able to meet their financial commitments, leading to closures or bankruptcies, and hundreds or thousands of workers could lose their jobs. In some countries, central banks have implemented asset purchase programs combined with a sharp reduction in key interest rates.
The structure of popular monetary policies in emerging markets includes increasing lending activity by 35%, lowering interest rates by 20%, intervening in the foreign exchange market by 20%, reducing debt. reserve requirement ratio of 15% and the purchase of government bonds up to 10%. Many central banks in emerging markets are implementing asset purchase programs, primarily by purchasing local currency government bonds, and for the first time helping governments fund huge budget support programs. In most cases, they are between 0.5% and 1.5% of GDP in emerging markets, compared to 2% to 15% of GDP in advanced economic markets.
The United States is one of the countries that has suffered the most in terms of the number of viral infections, the highest number of deaths, as well as severe economic losses during the Covid-19 pandemic. This has caused a partial recession in the US economy since February 2020. The US unemployment rate reached 14.7% in April 2020 and by August 2021 it had fallen to 5.2%. The US government has put in place a tax policy to stimulate the economy and provide support to those affected by the pandemic. To do this, the US Federal Reserve (Fed) has implemented very strong monetary policies such as lowering interest rates and quantitative easing (QE).
Resumption of production
Throughout 2020, since the pandemic started to spread, although the global economy experienced serious difficulties, such as very weak growth and many countries with negative growth, the inflationary pressure was not that great. , energy prices were still low, the supply chain had not yet been disrupted, but the consequences of possible future inflation were also not obvious. It is the social security and assistance policies of countries that provide assistance to people in times of enormous loss. By 2021, several countries have started to reopen under conditions of containment, mainly due to the speed of vaccination of their populations. However, they still faced disruptions in production supply chains, logistics were in constant turmoil, there were huge labor shortages and rising energy prices, and as a result, there was an increase in demand for essential goods.
The imbalance between supply and demand can be considered the main cause of high inflation today. Currently, there are two views, i.e. either inflation is only temporary or inflation will be very durable in the years to come. The recent Fed meeting in early November provided some insightful insights. The first was that inflation in the United States in 2021 will be very high, so there is a need to reduce the scale of asset purchases, currently at $ 120 billion per month, which will end in March 2022, creating the conditions for the Fed to start raising interest rates.
The second is that the fundamentals of inflation in the United States are unsustainable, as supply chain disruptions will soon be reconnected and the wage-price-wage spiral effect will not last long either. The third is that the US inflation forecast of around 2% by the end of 2022 will bring the average inflation path in about four years to the target level of 2% per year. These snapshots show that current US inflation is under control and that many other economies can also control inflation using appropriate macroeconomic policies.
Energy prices are expected to increase in 2022. This will be due to the fact that from the third quarter of 2020, global consumption of crude oil and petroleum products increased more than production, resulting in low reserves. However, the US Energy Information Organization (EIA), in its November report, predicts that an increase in production from OPEC, the United States and other countries will lead to increased stocks and crude oil price. The price of Brent oil is expected to average US $ 84 per barrel in December 2021 and fall to US $ 66 per barrel by December 2022, or even face a 21% decline. The price of WTI oil will average US $ 81 per barrel by December 2021 and decline to US $ 62 per barrel by December 2022, a 23% net drop.
Recent US polls show that the Fed will raise interest rates in the first half of 2022. It is likely that the Fed will raise interest rates by May 2022 to over 50% and it is expected that by By the end of 2022, the base rate will increase by at least 0.75% with a probability of exceeding 65%.
Monetary policy in Vietnam
Serious global issues such as high inflation, rising energy prices, and expected US dollar interest rates in 2022, and how they will affect Vietnam, are very important prerequisites to be aware of when the the potential of monetary policy in the post-pandemic period for economic recovery is considered. This will determine the size of the stimulus packages and the extent to which the economic recovery will be appropriate, achievable and not destabilize the macro economy in the future. However, finding the right financial resources and how to mobilize those resources will not be a simple task. In addition, it is necessary to pay attention to warnings about importing inflation into Vietnam, although this is not likely to happen in reality. Moreover, the characteristics of inflation in Vietnam show that the transmission of inflation is not easy to occur.
In order to cope with the current crisis caused by the Covid-19 pandemic, Vietnam needs a sufficiently broad and flexible financial support program to help businesses and people recover physically, mentally and professionally after the check-up. drastic last months of foreclosure conditions. , as well as the looming fear and the strong possibility that new, more serious epidemics will reoccur. The Vietnamese economy may fall into a prolonged state of stagnation, losing many advantages as well as opportunities to achieve development goals set without these support programs.
Currently, there is still room to carry out monetary policy, as the level of inflation until the end of October was still low, with a CPI below 2% and core inflation below 1%, which should be below 3% by the end of the year. The State Bank of Vietnam can reduce the operating interest rate by at least 1%, and also expand and relax the discounting and financing conditions for loans. This will lead to a substantial drop in the average commercial loan rate.
In particular, a number of targets such as the short-term capital ratio for medium and long-term loans should be maintained until at least the end of 2023, in order to reduce the pressure to raise interest rates. deposits. Regarding the credit risk coefficient, while ensuring the minimum capital adequacy ratio (CAR), companies that suffer losses during the pandemic may have a lower credit risk ratio than the current level, which will help them access credit, while the Debt Freeze and Debt Extension Mechanism will continue until mid-2023.
In terms of policy, the National Assembly should consider setting an average inflation target for the next three to five years. Monetary policy need not operate in such a way that annual inflation falls below the current target of 4 percent net, however. Although there are years of high inflation and years of low inflation, the average inflation in about three to five years only needs to stay below 4%.
In addition, the supportive fiscal policy must have financial resources in the form of stimulus and support plans. As part of the upward trend in international interest rates, foreign borrowing is not very suitable, so the main source of finance becomes domestic debt. Referring to the various experiences of other countries regarding the fact that the Central Bank directly buys treasury bills and also carries out repo transactions, it is advisable to consider the purchase of government bonds by the Central Bank. ‘State of Vietnam. These bonds provide budget support and tools to manage monetary policy, such as injecting money by buying government bonds and pulling money out by selling government bonds to credit institutions.
In particular, fiscal policy emphasizes policy flexibility and effective coordination with monetary policy. With monetary policy still broadly spread out, while fiscal revenues are expected to increase for the year as a whole, they will always be above estimate; the budget deficit and the public debt ceiling will remain within authorized limits; and public debt will remain low compared to the security threshold and ceiling approved by the National Assembly. In addition, the ability to raise domestic financial capital is still quite abundant, when the interest rate of government bonds is around 2.09% per annum for a period of ten years.
The State Bank of Vietnam uses the money supply or deposits of credit institutions, including reserve deposits or payment deposits, to purchase government bonds. This is a primary business, while secondary market business requires the involvement of investors and the State Bank of Vietnam. The recent implementation of treasury bill buyback by the Treasury due to a temporary shortfall in the state budget should actually have been led by the State Bank of Vietnam.