Central bank to issue bonds to check inflation

The State Bank of Vietnam (SBV) plans to reduce excess liquidity in the financial markets by issuing bonds in a move to curb inflationary pressure.

Nguyen Dong Tien, SBV deputy governor, said on August 13 that the central bank plans to continue keeping liquidity in check to rein in inflation, which accelerated to 8.39% year-on-year in July.

His statements came during a press briefing held by Government bodies to announce measures to keep inflation below 8.5% this year. A major cause of rising prices, said Tien, was foreign capital inflows, which the central bank has been forced to eat up in an effort to control the dong exchange rate and increase capital reserves.

“We face a historic problem in the SBV’s monetary management system: foreign capital inflows are too much. We, on several days, purchased up to US $500-600 million daily, while the total amount of foreign capital purchased for the entirety of last year was only US $4 billion,” said Tien.

Capital inflows have been fuelled by foreign direct and indirect investments, official development assistance and overseas remittances.

As a result of SBV buying, foreign currency reserves have doubled since the start of the year and are enough to cover imports for 20 weeks, the Government’s 2010 target, said the deputy governor. Unfortunately, it has also led to excess dong in the market, which helped drive domestic price levels higher.

State Bank officials are now considering issuing short term bonds through open market operations to absorb some of the excess cash floating in the market.

Tien said the central bank would spend the rest of the year withdrawing cash previously used to acquire foreign capital. As much as 82% of cash used to purchase foreign capital in January-July has already been withdrawn from the market.

The Ministry of Finance on August 13 also said it would issue bonds worth roughly VND 18 trillion (US $1.1 billion) in the third quarter to reduce liquidity.

The central bank has already taken steps to cut the amount of capital in the market this year. The State Bank in June doubled reserves requirements for commercial banks to 10%, which took out roughly VND 30 trillion from the market.

Source: VNE