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Money supply and the relationship between Money supply and Interest Rates Group F Team’s members Contribution Hoàng Minh Ngọc 26% Trần Thu Hà 23% Nguyễn Thị Thu Trang 23% Mai Trọng Hiếu 14% Nguyễn Ngọc Dũng 14% TABLE OF CONTENTS A 01 02 03 B OVERVIEW MONEY SUPPLY INTEREST RATE THE RELATION 01 02 03 MONEY SUPPLY AND INTEREST RATE IN VIETNAM INTEREST RATE POLICY MONEY SUPPLY AND INTEREST RATE IN VIETNAM IN 2021 Q&A Definition Total quantity of money variable to the people in an economy Two things about any measure of money supply: • The supply of money is stock variable, total amount of money at any particular point of time • Stock of money always refers to the stock of money available to the “public” as a mean of payment and store of value Rationale of measuring the money supply Emprirical analysts of money supply is important for two reasons: ● It facilitates analysts of monetary developments in order to provide a deeper understanding of the causes of money growth ● It is essential from a monetary policy perspective as it provides a framework to evaluate whether the stock of money in the economy is consistent with the standards for the price stability and to understand the nature of deviations from this standards a The sources of money supply The decisions of the central bank based on the authority conferred on it b The supply responses of the commercial banking system of the country to the changes in policy variables initiated by the central bank to influence the total money supply in the economy Several standards of measuring the money supply The Monetary base M1 Sum of currency in circulation and Sum of currency held by the public and reserves balances transaction deposits at depository institutions M2 M1 + saving deposits, smalldenomination time deposits and retail money market mutual fund shares Determinants of money suppply Two theories of the determination of the money supply:   First view, money supply is determined exogenously by the central bank Second view, the money supply is determined endogenously by changes in the economic activity which affect people’s desire to hold currency relative to deposits, the rate of interest, etc An important determinant of the money supply a An increase in RRR reduces the supply of money with Required Reserve Ratio commercial banks and a decrease in RRR increases the money supply The RRR is the ratio of cash to current and time deposit liabilities which is determined by law Commercial bank reserves consist of reserves on deposits with the central bank and currency in their tills or vaults OMO: purchase and sale of gov securities and other types of assets, both gov and private in the open market When the CB buys/sells securities in the open market, the level of bank reserves expands or vice versa b The RRR is the ratio of cash to current and time deposit liabilities which is determined The Level of Bank Reserves by law The discount rate policy affects the MS by influencing the cost and supply of bank credit to commercial banks A high discount rate means that commercial banks get less amount by selling securities to the central banks Interest rates policy In order to keep up with macroeconomic October 20, 2020, SBV had The deposit interest rate in Terms of 12 months or more, situations and international financial markets, adjusted the operating rates VND is set at 0.1 – 0.2 Interesr deposits interest rate aslo dealing with the negative impact of COVID-19, four times since Dec 2019 rates for term deposits from dropped to 6.0%-7.1% a year State Bank had reduced the operating int rates Reductions were by 0.5% month to less than months The highest deposit interest to remove difficulties for production and points, the rediscount rate is decreased to 3.7%-4.1% a year; rate of some banks with state- business activities currently at 2.5% per year, from months to less than 12 owned capital was 5.5%-6% refinancing rate is 4.0% per months is 4.4%-6.4% a year The maximum short-term year lending interest rate was 5.0% per year The solution to decline int rates has not really Through the purchase of foreign currencies to supplement foreign exchange reserves, the SBV has pumped out nearly VND350,000 Thus, int rate level decreased significantly, deposit int rate decreased by 1.5-3% points; lending rates billion into the market, liquidity is always in an abundant state fell 0.5-1% point brought effectiveness to stimulate capital for production and business activities because most enterprises’ inputs and outputs were simultaneously affected Due to the pandemic, credit demand has weakened significantly Total credit balance as of Nov 17, 2020 reached VND8,790 thousand billion, increased by 10.28% yoy Demand for credit increased weakly, int rates declined deeply Credit growth rate tended to improve in the 3rd quarter of the year Capital raising, though decreased, is still higher than credit growth The effect of recent int rate cuts on the economy became more insignificant The deposit and lending rates in market decreased since the beginning of the year, when the banking system has always been in a state of money surplus due to the low credit growth Consequently, Recent reduction in the executive interest rate did not have much impact on the absortion of loans in the economy The main reason is that credit growth has been low and prolonged, showing that the demands for loans were not high, or the banks’ concerns about the bad debts Money supply and Interest rates of Vietnam in 2021 • Deposit rates in Vietnam have fallen sharply from more than 14% to just 4-5% The downward trend may not stop • II Interest rate In Sep 2021, the money market received a new reduction in VND deposit int rates, from 2.7-4.0% for terms of less than months; 3.7-5.0% for 6-12 months; and 4.6-6.5% for more than 12 months • Big basnks, the 6-month term int rates has been reduced to 4%/year; 12-month term is less than 5.5%/year In the past 10 years, deposits int rates in Vietnam have decreased by about 10% points, the strongest decrease in Southeast Asia According to Dr Nguyen Tri Hieu, the main reason for Vietnam’s deposit int rates to drop sharply is that inflation has been cotrolled; the liquidity of banks in recent years has always remained in an abundant state, thereby helping to stabilize deposit int rates Dr Dinh The Hien believes that the reducing of deposit int rate from 14-15%/year to 4-5%/year is the result of bringing the economy – finance from unstable state to normal state Vietnam's real interest rate in the past 10 years (Source: World Bank) Vietnam's inflation rate in the past 10 years (Source: World Bank) Vietnam’s money growth in the past 10 years (Source: World Bank) With depposit int rates at a record low, the Total deposits decreased by Prolonged epidemic has affected amount of deposits into banks has slowed 0.2%ncompared to the previous corporate revenues and led to an increase down markedly since the beginning of the month and only increased by 3.6% in demand for cash year compared to the end of 2020 Deposit-credit gap continues to narrow, this difference has not really created pressure and the deposit int rates will continue to move sideway, may even decrease The liquidity of the banking system is The liquidity of banks is forecasted to be even All aimed at injecting more Vietnam doing in a more abundant state than last more “abundant” when the SBV changes the into the market, in order to support the year, a year a go the SBV almost did method of buying foreign currencies for futures economy not use open market activities to spot, lower interest rates According to SSI Research, the SBV maintained a stable M2 money supply growth rate of around 13-14% To cope with the pandemic, the SBV has cut the policy int rates times and the int rates caps for loans, short-term deposits in 2020 but did not pump more money into the open market The amount of money pumped into the market in 2020 is mainly through transactions of buying foreign currencies to increase foreign exchange reserves => Money policy of Vietnam is still very cautious and high stable The interbank market,  Int rates remained at 0.2-0.3%  The supply on the interbank is still very plentful, the int rates on the interbank market are expected to continue to move sideways CONCLUSION The Interest rates level is likely to bottom out in the first half of 2021 However, int rates are forecasted to increase slightly in the second half of the 2021 due to many reasons - The channel for injecting liquidity of VND into the market is limited Credit growth in the last months of the year will usually recover quickly To tighten the short-term mobilizing ratio for medium and long-term loans, effective in Oct 2021 will strengthen the level of deposit competition and reserve the trend of falling deposit int rates THANK YOU FOR YOUR TIME! 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