VNU. JOURNAL OF SCIENCE, ECONOMICS-LAW, N01E, 2004

U SIN G THE IN TER EST RATE TOOL TO CONTROL
INFLATION IN VIETNAM
V u T h i D a u (*

Inflation is considered as a phenomenon

Form ula

(2) shows

th a t

when

the

associating w ith the m a rk e t economy, so in

estim ate d inflation r a te increases, it wil

modern economic circumstances, controlling

make

inflation is one of the essential ta rg e ts of

reflecting th e decrease in the real costs 01

each


in

which

the

is

decrease

inflation is not easy as inflation results
an d

m arket,

rate

beneficial

d e m an d s

money

different in te re st ra te tools in controlling

borrowm g money decreases, the interest

inflation to gain various goals. This article


the

increases,

for

for

supply

O-

•effect. This effect implies th a t if you fight

lim itations of this tool.

ag ain st inflation by lowering in terest ra tf,

1. The B asis o f C on trollin g Inflation
by In terest Rate
W ith

reg ard

to

th e

it is c ertain t h a t you will fail: the inflation
will increase.


nine

developed

G erm any, Switzerland,
1983

i = ir + n * (1)
-> ir = i - n e (2)

relationship

i = in te re st

inflation.

The

ir: real in te re st

countries

which

n e : estim ated inflation ra te

inflation ra te are the ones which have hib'h

(This is an in te rn a tio n a l research on the

are

Italy 1


5

Vu Thi Dau

Fnce and C a n a d a a n d they are
tfee nations

th e

in te re s t

r a te

in

re a lity

is

considered as th e solution of m any nations,

lirtst rates; four n a tio n s w hich have low

including developing nations. Since 1983,


been

H aid and Sw itzerland, a n d they a re

po pu lar in L a tin A m erican co u n tries a n d it

a) he nation s which h av e low in te re st

h a s also become th e p rim a ry factor in the

ns

stabilization p ro g ra m m e s of K orea an d

ỈI brief, they a d m itte d in theory an d in
p:tce

th a t

th e

re la tio n sh ip

betw een

irn s t ra te a n d inflation is undeniable. It
isu basis for using th e in te re s t ra te tool
icoitrolling inflation in m any different
nois in modern economic circumstances.



n t)ol in controlling inflation d urin g the

in te re st ra te (J a p a n im p le m e n te d th e zero

daces w hen

in te re s t rate, C h in a from 1996 to July,

th e

economy

faced

the

different

m e a s u re s

deflation,

ĨDhable situ a tio n of inflation rate. In th e

1997 seven tim es

y rso f 1979 and 1982, th e inflation ra te

rate).

t'lf.28% - th e h ig h e st in te re s t ra te in
Fn:e’s history, in o rd e r to repel th e
iiaton.

W ithin only six m onths, th e

dxnnt ra te w as ra ised twice as m uch as
t t n 1980. The solution to th e problem

controlling inflation can n o t stay for a long
time. If the in c re ase in th e in te re s t ra te
lasts to fight a g a in s t th e inflation, it will
decrease in v e stm e n t, total d e m an d and
o u tp u t an d u n e m p lo y m e n t will rise. The
fact

in

th e

c o u n trie s

fighting

a g a in s t

inflation by u sin g th e se tools has proved
this.

W hen

)

d em and decreased a t - 5% in November,

again m ade inflation continue to gr«wf

1981. T his implies t h a t using the in te re st

th e

ra te tool in controlling inflation can affect

considered

the

economic

increased by 2.2 tim es in 1980; 29.9 iis

ta rg e ts and th a t u s in g the in te re st ra te

in 1985; 131.1 tim es in 1986; 548 tir.ea

tool should be carefully considered.

1987.

im plem en tatio n


prices of commodities increase constin.
In such high inflation, it was the firs te
th e S ta te of V ietnam raised the ques\ 0 )f
fighting

a g ain st

inflation.

T h en a*

inflation p ro gram m es were d ra w n ipi

many offices under different level d
branches. Thus, a t t h a t tim e th e re Via
renovation in th e view a n d w y if
acknow ledging inflation. From th e n ci,e
m e asu re s of fighting a g ain st inflation we

been adm itted, b u t th e retail prices of

defined,

commodities and services in th e m a rk e t

im p le m e n tin g

increased by 20 % per year. From 1981,

such as carry ing out the m a rk e t pe

Especially,
tools

of

including

per y ear a n d afte r t h a t it re m a in e d a t the

controlling th e inflation.

placed

V ie tn am ’s

self-on>l

th e

in te re s t

ra te

refom)f
plies,
tol n

By 1989, in te re s t ra te h a d onl bn
considered as a tool to im plem e.t le


V ie tn am

S ta te

to

in

re n o a n

the

th e

economy

stQS>f

m onetary

1986, inflation re a ch e d the level of 747 %
th re e digit level for th re e years, which

th e

th e

economic

w idening

discriminatory tre a tm e n t between eonii(

V N u , Jo u rn a lJ)f Science, Econom ics-Law , N ()IE, 2004


V u Thi Dau

‘cors and u n its an d show ing th e s ta te ’s

th e

ikidization

in te re s t rate, m e an w h ile th ese clients used

to

th e

s ta te

enterprises,

capital issued

w ith

the subsidized

socially, it is the real in te re s t ra te th a t


th e budget o v e rsp en d in g requ ired to be

ra te

policies,

in te re s t

ra te

Ofcened inflation.

and

c o n trib u tin g

to

the

solved by issuing money. Therefore, the

?irst, in te re st ra te did not encourage
e saving in th e economy. In 1993, if a

volume of currency in circulation increased
rapidly.

ie*t kept 1000 VND in th e bank, the

w as

objective

underdeveloped,

re q u ire m e n ts

for

'i^ tn a m only had a very little am o u n t

reno vating

Sivings, they couldn’t allow th a t sum of

tra n s fe rrin g the one level b anking system

01ey to devalue w hen keeping it in the

(built in 1951) to th e two level banking

so they often used th a t a m o u n t of

system. W hen Decree No.53 (March, 1988)

the

b a n k in g


were

oving and inflation was worsened.
tecond,
n

ro w capital from the b a n k s to m ain ta in
ei‘ production an d b u sin ess operations
d t h e n stored commodities, w aiting for
e lig h e r prices in o rder to get benefits. It
*(e th e capital scarcer a n d th e prices of
m n o d ities continued increasing.

laying down as a policy th e surplus real

interest rate and considering the interest
ra te as an im p o rta n t tool of the m onetary
policy. At th a t tim e in te re s t ra te consisted
of two kinds: Subsidized in te re st ra te an d
agreed

in te re st

in te re st

r a te

ra te .

fa c ilitated

The

subsidized


VNU. Journal o f Science, EconomicS-Luw, N„IE, 2004


Using the interest rate tool to.

Vietnam. The in te re s t ra te w as initially

The competition of th e u n its which da

reg arded as price of currency and w as
gradually d e te rm in e d by th e m arket, th u s,

with money p ushed th e in te re st rate 0
hig h er level. The in te re s t ra te apple* 1

it m anifested a signal in V ie tn a m ’s credit

reality w as too high, exceeded the caoait

market.

of the m arket and caused the Ciptc
borrowing clients’ stron g reaction. At h
end of 1988, b a n k s h a d to reject the zg?e
lending. From M arch in 1989 -h
governm ent decided to change the inteet
ra te policy fu n d a m e n tally an d accorii g’
th e re was a difference betweer th
effective in te re st ra te and the estinite
in te re st rate. It is e stim a te d th a t intee:

to

F e b ru a ry in 1989, th e in te re s t ra te w as
adjusted twice in th e direction of lessening
subsidization d ra m a tic a lly th ro u g h credit
and inflation factor. The G overnor director
of the S ta te B an k s tip u la te d th e agreed
in te re st

r a te

b ased

on

two

principles:

agreed loan in te re s t ra te w as equal to th e
highest deposit in te re s t r a te (at t h a t tim e
it was 8%) plus ad d itio n a l b a n k charge (at
th a t tim e w as 0.3 -

0.4 %), th u s th e

in te re st ra te s increased rem ark ab ly . This
in te re st ra te policy played an active role,
avoiding
ad van tag e


made
an d

minuses, revoke capital an d increase the
circle of capital. Therefore, the price index
dropped to 7.2 % p e r m onth in the last six
m onths of 1988 a n d 5 % per m o nth in the
first six m on th s of 1998.
Moreover, com m ercial b a n k s dealt w ith
in te re st ra te u n m eth o d ically and raised

follows:
1) The in te re s t ra te m u st be enouih
preserve the capital a n d profit.

higher th a n the guided one. In particular,

2) A u n ite d in te re s t is applie*
economic sectors a n d ad justed to t

the guided in te re s t ra te of the state b an k

fluctuation of m a rk e t prices.

the in te re s t r a te to th e level th a t was

on J u n e 6th, 1988 was 8.3 %, b u t some
ban k s im p le m e n te d with th e level of 8.4 %,
commonly with 9 - 10 % a n d even 11- 12%.

appreciated
inflation.

th e

and

V ie tn a m ’s

The

In te rn a tio n a l
World
fight

developm ent

B ank
a g ain st

pro g ram m e

report of th e U nited N ations in December,
*) The stru c tu re of th e in te re st ra te of
’S/Digg an(j th e loan in te re s t ra te consists
basic in te re st r a te a n d th e index of
ủ n ịa jre in m a rk e t prices.
•phe

principles

k

of which the effective contribution of the

in te re st ra te s

ifectiye

ones

in

becam e
1989.

ne>e$t

ra te s

w ere

nlation

ra te

(from

th e

su rplus

to

average by 2.5 % / m o nth (15% / m onth in



renovation,

the

th a n th a t in 2000, th e economy w as stil ir

crisis, commodities becam e plentiful and

deflation a n d the economic growth d d n i

diversified, m ate ria l and sp iritu a l life of

reach th e ta rg e t of 7.5 % p er yea

the people was gradually improved.

proposed by th e N ational Assembly C-t )nb

From
re m a in ed

th e

economy

overcam e

1996, th e price index always
at

brief, th e deflation re su lted from econ^nii

1998, 9.2 %; 2000, - 0.6 %; 1999 and 2001,

m echanism and stru c tu re , low a n d v.nivei

0.1 % a n d 0.8 %. T h a t situ a tio n placed

incom e

V ietnam

strong

in v e stm en t and fluctuation in th e vorl

deflation. If in 1996 the deflation lasted

m arket. In 1997, th e s ta te p u t fpr^ar

four m onths (from May to A ugust) w ith the

four groups

total deflation ra te of 1.6 %, in 1999, the

d em and in th e economy. In 1999, Ifi^rke

deflation continually lasted e igh t m onths


t h a t in th e sam e period of 1999 (2 % as
com pared with 3.6 %). T h a t s itu a tio n led
to the general price base of th e economy in
2000, which w as much lower th a n th a t in
1999 (- 1.6 % as com pared w ith + 0.1 %). In
2001, due to the g ov e rn m e n t’s m e asu re of
s tim u la tin g d em an d to aim a t overcoming
deflation (im plem enting th e no-more- th a n
- 5 % inflation objective proposed by the
N atio n al Assembly), th e economy couldn’t
overcome
lasted

this

th re e

situation:

m onths

th e

deflation

successively (from

M arch to J u n e) a n d in 2001, th e consum er

VNU. Journal o f Science, Econom ic S - L u w

th e loosened m o n etary policy a n d active
renovated th e in te re st ra te policy ÌI’ ^
direction of liberalization to improve tỉ
situation. The in te re st ra te policy v.nd

th e im port price of nitrogen, th e increase
in steel price, and th e bird flu epidemic in
our country and in some others. The

interest

years

situation above hap pen ed while th e whole

aiming a t stopping th e deflation didn’t

country made a n effort to im p le m e n t the

gain the re s u lt as expected, th e deflation

objective of high a n d solid economic growth

continued to get worse in th e years of 2000

in the period of 2001 and 2005, which

a n d 2001 (the price index in 2000 was —

posed a difficult question for th e economic

0.6 % and in 2001 w as 0.8 %). It showed

policy m akers. The S ta te B an k of V ietnam


interest rate: four tim es in 1996, twice in
ra te

fulfilled due

lowering

to

the

in

th e se

im p lem en tatio n

of

various com prehensive solutions.

such

as

th e

influence

of


th e

B ureau of S tatistics, pa rtic u la rly in

curbing inflation have to aim a t controlling

February, 2004, th e index of price increase

the prices of in p u t commodities. W h atev er

in the m a rk e t w as 3 % (equal to the level

the causes are, to overcome inflation, it is

of price increase of th e whole y e a r 2003).

n ecessary to a d ju st th e in te re st r a te to th e

G enerally calculating,

relationship betw een supply and d em an d

in

th e

first two

m onths, it increased by 4.1 %, th is h a s

lessons are d raw n from experiences as

in V ietnam , some

follows:

V N U , Journal o f Science, Econom ic S ' Law, N 0JE, 2004


Using the interest rate tool to.

61

First, inflation re s u lts from various

Third, in te re st ra te is one of the tools

causes, so it is impossible to use in te re st

of economic

ra te in all cases as a tool to achieve the

m on etary policy in particu lar; therefore,

goal as expected.

w h en

Second, in te re s t ra te is a special kind

different

tools

to g eth er to get th e b e st result.
Fourth,

w hen

inflation

becomes

and fully considered. The d e term in a tio n of

complex,

in te re st ra te in each na tio n is different,

carefully used in ord er to achieve the

but the common tendency in the m a rk e t

defined economic ta rg e ts (do not allow the

economy is to liberalize th e in te re st ra te

in te re s t ra te to be a n obstacle to the

when necessary.


Ngân hàng Nhà nước Việt Nam, Báo cáo thường niên các năm từ 1996 - 2003.

5.

Ngân hàng Nhà nước Việt Nam, Báo cáo chính sách lãi suất ở Việt N a m (Bản sô 1), tháng
11 - 2002 .

6.

Ngân hàng Nhà nưốc Việt Nam, Tài liệu hội thảo “J3àn về cho vay theo lãi suất thoả thuận
bằng đồng Việt N a m ”, Hà Nội, 2002.

7.

Nguyễn Minh Phong, L ý thuyết lạm phát, giả m p h á t và thực tiễn ở Việt N a m , NXB Chính
trị Quốc gia, Hà Nội, 2000.

8.

Thời báo kinh tế Việt Nam, K inh tế V iệ t N am và Thê giới'. 2000 - 2001, 2001 - 2002, 2002 2003, 2003 -2004.

9.

Viện tiền tệ tín dụng, Ngân hàng Nhà nước Việt Nam, Thông tin chuyên để lãi suảt ngàn
hàng tập 1, tập 2, 1991.

V NU, Journal o f Science. Ecotiom ics-Luw, N„IE, 2004