In 2018, monetary policy is likely to remain loose
(Updated at 10:41, 22/1/2018)
Regarding the orientation of monetary policy, if there is no big shock from oil prices leading to higher CPI, there is still room for the State Bank of Vietnam to maintain its loose monetary policy in 2018 to keep the rhythm of growth.
So how much loosening of the money supply is reasonable? Research by Bao Viet Securities showed that Vietnam is currently the country with the highest M2 growth in comparison with the group of countries including Thailand, Malaysia, Indonesia, Philippines and China, even in the period of crisis and the current stable period.
 
Economically advanced countries such as Thailand and Malaysia have an average growth rate of about 6% per year while countries with similar economic levels, such as Indonesia, the Philippines and China, have a growth rate of M2 of around 12-13% per year.
 
Average M2 growth rate/GDP growth in Vietnam is 2.8 times while countries in the region ranging from 1.5 to 2.5 times.
 
Based on these figures, it can be expected that in the coming time period, if Vietnam's economic growth rate is higher and more GDP-based growth is driven by economic restructuring, productivity gains, the growth rate of M2/GDP will be reduced to about 2-2.5 times. Then if the target GDP growth rate of 6.5-7% per year, M2 should increase by about 13-17.5% per year.
In the short term, when the transition is not immediate, a reasonable increase in M2 to support GDP growth without creating a risk of inflation may fluctuate between 16-18 %.
 
The growth rate of M2 may be as above, but the most important factor affecting the direction of monetary policy of the State Bank is still inflation. Vietnam's core inflation is quite low (only 1.3%), but the management of the State Bank of Vietnam in recent years is mainly based on movements of headline inflation (not core inflation).
 
According to inflation forecast in 2018, the health care group will not have much impact on CPI as the roadmap for price adjustment of this product is basically completed in 2016 and 2017. Education group is expected to still increase the CPI by approximately 0.5%. Thus, the impact of education and health on CPI in 2018 could be as low as 0.7-0.8% (decreased sharply from 2.5% in 2017).
 
In general, there are grounds for expecting unpredictable risks of rising commodity prices to be neutralized by the lower the level of impact of health care goods on the overall CPI in 2018.
 
In the positive scenario, if the average inflation in 2018 is lower than forecast (only 2-2.5%), there will be opportunities for banks to reduce their deposit rates. Only when the deposit interest rates decline, the new lending rates may fall as the NIM (Net Interest Margin) is difficult to reduce further as it is relatively low compared to other countries in the region.
 
Hong Ngoc
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