The interest rate policy operation in vietnam,graduation thesis

THE STATE BANK OF VIETNAM BANKING ACADEMY Foreign Language Faculty - - GRADUATION THESIS THE INTEREST RATE POLICY OPERATION IN VIETNAM Lecturer : Can Thuy Lien (M.A) Student : Bui Viet Trinh Class Student Code : K15-ATCA : 15A7510243 Hanoi, May 2016 THE STATE BANK OF VIETNAM BANKING ACADEMY Foreign Language Faculty - - GRADUATION THESIS THE INTEREST RATE POLICY OPERATION IN VIETNAM Lecturer : Can Thuy Lien (M.A) Student : Bui Viet Trinh Class : K15-ATCA Student Code : 15A7510243 Hanoi, May 2016 Bui Viet Trinh K15ATCA DECLARATION I hereby affirm that this research is my own work through my serious searches and my great attempt and not a reproduction of the previous works Borrowed information and notions as well as resources from other sources have been duly referenced and acknowledged Bui Viet Trinh K15ATCA DEDICATION My deepest thank goes to my thesis advisor, M.A Can Thuy Lien, whose great assistance and expertise made a significant contribution to the completion of this thesis My accomplishment on this thesis is also credited to all lecturers in Faculty of Foreign Languages, those who have given me enthusiastic instructions and support since I was a fresh man in Banking Academy Special thanks are also sent to my friends for giving me such a great encouragement to fulfill this work and to publish it Last but not least, this humble work is dedicated to my beloved family- my Father, Mother, Brother and Sister whose affection and love inspire me to achieve such great success and honor This thesis would not have been possible without them Bui Viet Trinh K15ATCA ABSTRACT It can be clearly seen that the monetary policy is one of the most important macroeconomic policies used to control the economy The interest rate policy which is considered as an extremely crucial and effective tool of the monetary policy has strong and direct impacts on the operation of credit institutions Therefore, the operation of interest rate policy constantly remains being an overwhelmingly concerned issue Based on general knowledge about banking and finance and specific information about the interest rate policy in Vietnam, this thesis conducts a research on the interest rate policy in Vietnam with the aim of providing insight into the interest rate and how the interest rate policy is run in Vietnam Importantly, the reality of the interest rate policy operation will be thoroughly analyzed and evaluated From these evaluations, this research brings out solutions and recommendations which hopefully might be useful in exploring effective strategies for Vietnam economy in the future There are four chapters in this research: Chapter 1: Introduction Chapter 2: The overview of the interest rate Chapter 3: The reality of the interest rate policy operation Chapter 4: The evaluation of the interest rate policy and solutions Bui Viet Trinh K15ATCA TABLE OF CONTENTS DECLARATION I DEDICATION .II ABSTRACT III TABLE OF CONTENTS IV LIST OF TABLES AND FIGURES VI LIST OF ABBREVEATIONS VII Chapter 1: Introduction 1.1 Rationale of the study 1.2 The objectives of the study 1.3 Methodology of the study 1.4 Scope of the study 1.5 Structure of the study Chapter 2: The overview of the interest rate 2.1 Definition of the interest rate 2.2 Classification 2.2.1 Based on credit term 2.2.2 Based on credit type 2.2.3 Based on the interest rate value 2.2.4 Based on the interest rate regime 2.2.5 Based on the methods of calculating the interest rate 2.3 Factors affecting the interest rate 2.3.1 Capital demand and supply 2.3.2 Inflation 10 Bui Viet Trinh K15ATCA 2.3.3 The budget deficit 10 2.3.4 Taxes 10 2.3.5 Risks 10 2.4 The role of interest rate in the economy 11 2.4.1 The role in capital mobilization 11 2.4.2 The role in investment 11 2.4.3 The role in the operation of commercial banks 12 Chapter 3: The reality of the interest rate policy operation 13 3.1 The interest rate policy from 1988 to 1992 13 3.2 The interest rate policy from 1992 to 1996 15 3.3 The interest rate policy from 1996 to 2000 17 3.4 The interest rate policy from 2000-2002 20 3.5 The interest rate policy from 2002 to 2008 21 3.6 The interest rate policy from 2008 to 2011 21 3.7 The interest rate policy from 2012 until the present 33 Chapter 4: The interest rate policy’s effectiveness evaluations and recommendations 43 4.1 The interest rate policy evaluations 43 4.2 Solutions to the interest rate policy improvement 45 4.2.1 Goals and prospects 45 4.2.2 Orientations: 46 4.2.3 Specific solutions to the interest rate policy improvement 48 4.2.4 Solutions to the interest rate policy’s efficiency improvement in the long term 51 CONCLUSION 57 REFERENCES 58 Bui Viet Trinh K15ATCA LIST OF TABLES Table 1: Types of interest rates movements 25 Table 2: The deposit IRs on VND of different terms in 2010 25 Table 3: The deposit IRs on USD of different terms in 2010 26 Table 4: Types of interest rate’s fluctuation during the first months of 2010 29 LIST OF CHARTS Chart 1: The inflation rate, money supply growth and credit growth ( 1996- 18 2009) Chart 2: The exchange rate VND/USD ( 1992-2009) 19 Chart 3: The refinancing IR and discount IR ( 2010-2011) 29 Chart 4: The deposit IR in the first months (2010-2011) 30 Chart 5: Operating interest rates of SBV and interest rates of commercial 31 banks Chart 6: Operating interest rates of SBV 32 Bui Viet Trinh K15ATCA LIST OF ABBREVIATIONS SBV The State Bank of Vietnam CBs Commercial Banks IRs Interest rates CCIR Commercial Credit Interest Rate GDP Gross Domestic Product GNP Gross National Product Bui Viet Trinh K15ATCA CHAPTER 1: INTRODUCTION 1.1 Rationale of the study Monetary is the most significant macroeconomic policy of all nations due to its extensive impacts on all facets of life including economic, political, cultural and social ones It is obvious that in the specific case of a market economy, the monetary policy is seen as the “spirit” of the whole of operation of the central bank Therefore, the process of setting up and implementing the monetary policy constantly requires prudence in every single phrase This process totally depends on particular conditions of each period so that perfect decisions can be made with the hope of achieving the final target: the stability of currency Among various tools to conduct the monetary policy, the interest rate policy is the most frequently used The interest rate is one of the most vital elements of the economy It is common sense that a modern economy is naturally connected with IRs When using any loans, the borrowers are required to pay the extra amount of money, plus the principal Interest rate is the amount charged, expressed as a percentage of principal, by a lender to a borrower for the use of assets In other words, the difference between the loan the borrowers receive today and the amount of money they have to pay in the future is called interest It can be considered as the fee for using the loan in the specific time Regards to the nature of interest rate, interest rate is a two-side economic term If a reasonable and effective interest rate is set, it would become the useful tool to promote the production and the circulation of commodities, accelerating the development of the economy and vice versa Therefore, interest rate is both macro-economy tool of the Government and micro activity controlling tool of commercial banks The interest rate policy is considered as an effective one as it is consistently applied through the country and strictly and flexibly adjusted by the State Bank to be compatible with capital supply and demand, making contribution to the development of the domestic economy Bui Viet Trinh K15ATCA The decree No 381 by the Government partly improved the relationship between short-term lending rates and long-term ones This relationship used to be seen as an irrational one when short-term lending IRs was much higher than IRs for medium and long term loans The SBV set the average difference between lending IRs and deposit IRs to be 0.35% per month This regulation encouraged commercial banks to carefully calculate the operating costs and to minimize this type of expense and to improve their competitiveness In July 1996, that long-term interest rates were set to be higher than short-term credit IRs facilitated commercial banks to actively operate their interest rates based on signals of market and the relationship between the capital supply and demand One of the overwhelming successes that interest rate policy brought to the economy is that the State Bank announced the base rate for loans on VND This type of IR was regulated based on referencing lending rates of nine commercial banks and domestic currency interbank IRs and the objective of the monetary policy and macroeconomic indicators  The limitations of the interest rate policy In the period of 1990 - 1993, there was still no specific direction to operate the interest rate policy All regulations on interest rates were made without any scientific calculations which led to the serious issue that it was terribly hard to flexibly apply these regulations into reality In 1993, the lending rate was at too high level and long-term lending IRs remained lower than short-term lending IRs There were various levels of interest rate At the early stages, there were up to 30 different interest rates SBV’s decision to lower interest rates was launched at the time when commercial banks were dealing with issues of deposit interest rates Moreover, with the difference ratio of 0.35% (between average lending interest rates and deposit interest rate) caused many difficulties for joint-stock commercial banks and small ones 44 Bui Viet Trinh K15ATCA Interest rate policy expressed the characteristic of social category, so it had great negative impacts on the business performance of the commercial banks Furthermore, the interest rate policy was set without considering risks that credit institutions might face in money trading activities For a long time, there was the difference between interest rates on domestic currency and those on foreign currency This triggered the difficulty in attracting foreign currencies from circulation and caused obstacles for customers who make loans on foreign currency Although the interest rate policy that medium-long term lending IRs are higher than the short-term lending IRs, was adopted, this IR policy did not pay attention to the capital structure and stick to the situation of the economy Besides, this policy did not figure out the flexible limited adjustment to enable credit institutions to deal with medium and long term capital 4.2 Solutions to the interest rate policy improvement 4.2.1 Goals and prospects Under the condition of the present economic market, the new interest rate mechanism does not increase the market interest rate and it also does not enable credit institutions to mobilize a great amount of capital This also helps ensure credit quality and meet requirements to promote economic growth and to stabilize VND value The interest rate policy should facilitate credit institutions and customers to reach an agreement on choosing a reasonable rate, which is beneficial to both parties The interest rate policy should encourage credit institutions to expand long-term fund mobilization and lending activities Specifically, foreign currency interest rates should be compatible with international rules, paving the way for commercial banks to boost activities of making loans in foreign currency The interest rate policy should create a flexible framework for credit institutions to apply the interest rate with the aim of competing, risk controlling, customer classifying Besides, SBV can still control the interest rates, not allowing credit institutions to 45 Bui Viet Trinh K15ATCA impose interest rates on customers, which can affect investment activities of the economy 4.2.2 Orientations: Keeping to make innovations and to improve policies and operation mechanisms of credit institutions is an urgent demanding requirement of the economy However, making decision on which solutions should be made must be taken into serious consideration and based on scientific research The most important factor is the proper awareness of positions, characteristics and development trend of the local and international credit institutions If this issue is well evaluated, renovations can be prevented from facing unnecessary mistakes, especially for a country which just switched to market mechanisms as Vietnam From the reality of running interest rate policy over the previous time, we could gain plenty of valuable experiences, especially in 1996 In spite of the fact that interest rate policy has obtained significant achievements, the interest rate policy still displayed shortcomings and contradictions In the next time, to upgrade the interest rate policy in such condition of our country, SBV should gradually promote the indirectness of interest rate policy, ensuring its flexibility and compatibility with the real inflation index, keeping up with volatilities of the market Interest rate policy should encourage attracting medium and long-term capital The long-term lending IRs should be higher than the short-term lending IRs In the long run, the objectives of the solution are to approach liberalization of interest rates and to create an equal environment for credit institutions This is also a necessary solution because the economy is going through the shortage of medium and long term capital and the redundancy of short term capital Previously, it was commonly recognized that the lending IRs for medium and long term loans must be low However, credit institutions have to get medium-long term deposits with very high IRs Therefore, credit institutions restrict to make loans by the medium-long term capital At present, when lending IRs for medium and long term loans are higher than that for short-term loans, credit institutions start blaming on difficulties in capital mobilization, the 46 Bui Viet Trinh K15ATCA pressure of inflation, high risks of interest rate Therefore, in order to encourage medium and long term investment, Apart from setting an appropriate interest rate for long term capital, SBV also need to combine a variety of factors such as moderate inflation, advantageous business environment  The interest rate policy’s compatibility with the actual development off the country SBV should not offer too high or too low interest rates If interest rates are too low, SBV will not control the amount of money in circulation, which leads to a serious consequence that inflation is out of control, directly causing credit institutions bankruptcy In contrast, too high interest rates prevent enterprises from making their investments, which results in stagnant economy Therefore, the decisions on interest rate policy should be wisely made and should stick the principle that inflation rate is lower than deposit rates, lending rates and average profit margin Moreover, in order to lower interest rates, SBV should not control deposit interest rates so that credit institutions can fulfill their capabilities and to increase their competitiveness On the other hand, following the principle of not hindering the liberalization of interest rates, SBV should actively interfere in market interest rates through refinancing interest rates and credit limit Using the domestic currency interest rates as a tool needs to cooperate with the use of foreign currency rates and the exchange rate policy and foreign exchange management mechanism This is the only way to make credit activities more flexible As a result, credit institutions can truly become an economic unit providing capital for the economy  The interest rate policy’s assurance of fairness, non-discrimination, equal environment for credit institutions From the reality of our country, interest rates remain social characteristic, which causes many problems to the business performance of the credit institutions Some credit institutions must implement the policy of the Government that they have to use their 47 Bui Viet Trinh K15ATCA deposits to make loans with low interest rates Therefore, they will probably suffer from losses for these loans There should be an equal business environment for all types of credit institutions, which will help to create the fair competition Making preferential loans or supporting the project should be personal duties of the SBV The interest rate policy should approach to running an interest rate that eliminates the difference between interest rates on domestic currency and those on foreign currency The gap between two types of interest rates caused many problems for the credit institutions: In the past, when foreign currency interest rates were lower than those on domestic currency, economic entities which had loan demand, attempted to figure out how to get foreign currency loans Meanwhile, some other credit institutions used mobilized funds to buy treasury bonds, which helped them to limit their losses Afterward, they used a number of treasury bonds as collaterals to get foreign currency loans with a very low interest rate These loans were converted into local currency loans with a higher interest rate The gap between types of interest rate was the profit that credit institutions illegally gained Apart from the above orientations, the interest rate policy must be consistently run Moreover, ineffective constant changes of the interest rates should be avoided so that credit institutions will not have to struggle with new regulations 4.2.3 Specific solutions to the interest rate policy improvement  Setting a reasonable ratio between short-term lending IRs and mediumlong term IRs Currently, after decisions of adjusting lending interest rates of SBV, the medium-long term IRs relatively increased to higher level than short term IRs In order to achieve the goal of transforming short-term loans to medium and long term ones, determining the appropriate level of interest rates should be thoroughly considered: Firstly, medium and long term interest rates have to be higher than short term rates because this type of 48 Bui Viet Trinh K15ATCA interest rate contains plenty of risks and inflation Secondly, the process of adjustment has to create the balance in the structure of loans  Determining the appropriate difference between the interest rate of domestic loans and that of foreign loans to attract more foreign investment In addition to the principle of ensuring domestic lending interest rate to be higher than world interest rate, the rate of inflation and domestic currency value should be highly concerned There is a fact that, in 1995 Vietnam attracted 6,471 million of foreign investments with 311 projects licensed Therefore, in order to make the interest rate policy become efficient, the adjustments should be implemented synchronously with other solutions This will help accelerate the process of investment and solve the problem of the local currency redundancy which is caused by “dollarization” when enterprises prefer getting foreign currency loans to getting domestic currency loans However, the fact that domestic currency interest rates are higher than foreign currency ones leads to the poor collection of foreign currency funds from circulation because interest rates are not attractive Therefore, the goal of the banking industry is to adjust the ratio between the domestic currency interest rates and those on foreign currency Besides, this ratio must be in similarity in the exchange rate policy in the current period  Improving banking legal environment to build customers’ trust and to encourage people's savings Practical theory shows that currency trading strictly demands the perfection of legal environment with two reasons: the attractiveness of the currency and risks of currency trading activities Switching to the market economy and improving legal environment are urgent and essential missions Firstly, banking law should be amended and improved The managing role of SBV should be strengthened Moreover, joint-stock banks and financial entities should be formed and improved Thus, capital using capacity should be promoted, making the connection between banks closer 49 Bui Viet Trinh K15ATCA  Approaching to liberalize interest rates in Vietnam Currently, the trend of globalization and integration is inevitable Apart from advantages, this trend also triggers variety of difficulties and challenges In this context, financial liberalization in general and interest rate liberalization in particular are essential tasks Nevertheless, it is not the right time for Vietnam to perform interest rate liberalization due to these following reasons: The first reason is that Vietnam is facing with the reality of the underdeveloped financial system and the lack of information about financial markets, especially in mountainous and rural areas Another one is that if the society imposes too many national objectives such as preferential interest rates on the financial system, it will be hard for the Government to get involved in the process of IR liberalization This makes the interest rate policy less effective The third reason is that tools that indirectly control currency are not strong enough to dominate the market The last one is that financial status of commercial banks is worse and worse due to low owner’s equity and a large number of bad debts When interest rates are liberalized, severe competition can probably push these banks to the edge of bankruptcy Therefore, in order to perform liberalization of interest rates, following tasks have to be done: the macro-economy should be stabilized in every aspect: GDP growth, inflation controlling, budget balance Moreover, the financial system from central banks to local ones should be strengthened It is necessary to enhance the information about financial market, currency market and stock market In addition, the balance between capital supply and demand has to be guaranteed and goods have to be delivered to the stock market so that the influence scale of monetary policy can be expanded 50 Bui Viet Trinh K15ATCA 4.2.4 Solutions to the interest rate policy’s efficiency improvement in the long term 4.2.4.1 Solutions to the stable and long term interest rate policy running In order to run a stable and long term interest rate policy, maintaining a reasonable interest rate which can both guarantee the goal of accelerating economic growth and preserve an aimed inflation level is extremely necessary Firstly, fluctuations of money supply should be limited In Vietnam, the relationship between credit growth and inflation was relatively close over these years There were three causes of inflation including the pull of demand, the push of cost and expected inflation The push-pull inflation happened due to the fact that the amount of money in circulation is greater than normal level This situation led to the increase in the money demand while the money supply remains unchanged Therefore, in the long run, inflation is controlled only if the volatility of money supply is managed Secondly, there should be the cooperation between interest rate policy and other macro policies At present, the interest rate policy in specific and the monetary policy in general still express many shortcomings Moreover, there was no collaboration between the interest rate policy and the fiscal policy, which hinders economic growth and inflation controlling The fact that the interest rate policy is set to be tight while the fiscal policy is loosen caused negative impacts on the economy If the fiscal policy is implemented accordance with the monetary policy in general, the interest rate policy in specific, all achieved goals of the fiscal policy will become a stepping stone for the interest rate policy to be run Therefore, it is crucial for SBV to combine these two policies to harness the maximum efficiency Thirdly, basic conditions should be improved to approach the aimed long term inflation policy 51 Bui Viet Trinh K15ATCA Being a part of monetary policy, interest rate policy also aims four main targets including: the decrease in unemployment rate, the increase in real GDP, the rise in domestic goods purchasing power and exchange rate stability It is obvious that SBV cannot achieve all these goals at the same time in the short run Therefore, SBV is enforced to choose a certain goal to focus on and to temporarily underestimate others With the aim of running the long term interest rate policy, the aimed inflation policy becomes the first choice of many nations in the world The inflation policy is defined as a basic frame of interest rate policy in which SBV makes a public announcement on the long run inflation ratio Importantly, SBV would make commitment to maintain this ratio, achieving the goal of economic growth and low unemployment At present, SBV has the sole ability to regulate the economy based on the amount of money supply Consequently, most of tools of interest rate policy that SBV used are not really effective which means that their functions are not fully harnessed Vietnam is suffering the lack of basic criteria to be able to successfully apply the aimed inflation policy However, it is extremely necessary for our country to step by step improve basic conditions and to prepare the process of applying the aimed inflation policy in the future 4.2.4.2 Solutions to the flexible and timely interest rate policy operation In the process of running the interest rate, types of interest rate have to be flexibly and promptly operated so that negative impacts on economic growth can be reduced Undoubtedly, the SBV needs to have prompt decisions to flexibly use tools, restricting methods that cause direct strike on the economy  The interest rates’ flexibility enhancing It is important for SBV to approach the interest rate liberalization Before 2006, since base interest rate was applied, this tool only helped to make orientation for lending activities and fund mobilization of commercial banks Afterwards, SBV made decision to regulate interest rates which cannot exceed 150% of base interest rate In May, 2008 when monetary market got into crisis, SBV launched the ceiling interest rate According to this regulation, lending IRs and deposit IRs cannot be 150% higher than 52 Bui Viet Trinh K15ATCA base interest rate However, the mechanism of ceiling interest rate shows many shortcomings because commercial banks attempt to find the way to constantly break this rule When the mechanism of the agreed interest rate is applied in banking system with various long term loans, approaching to the interest rate liberalization is the extremely important duty Nonetheless, under the circumstance in which Vietnam economy witnessed variety of interest rate races, liberalization of interest rate can be immediately performed The first duty is to flexibly modify base interest rate in accompany with fluctuations of market Another measure to raise the flexibility of interest rate is that SBV should consider rediscount IR as the basic to form the market interest rate It is necessary for SBV to actively modify types of interest rate that makes deep impacts on the market such as: rediscount IR, refinancing IR, overnight IR, interbank IR… In case the monetary market blossoms, rediscount IR can pave the way to create market interest rate However, this also puts pressure on SBV to strengthen operating procedure of monetary market and to establish the tight relationship between lending & deposit IRs and rediscount IR This is one the most common measures applied by developed countries in the world When rediscount IR declines, CBs that make loans from SBV with low cost tend to lower lending IRs, triggering the fall of deposit IRs  The open market operation upgrading In both theory and reality, open market business always expresses many outstanding features This is the only tool that the central bank can use to reverse unfavorable situations However, using this tool to reduce stresses on the interbank market did not bring as much positive outcome as expected This remarkably lowers the importance of open market’s involvement in maintaining interbank IR in the target framework of SBV Therefore, with the hope of increasing the number of means of running interest rate policy, it is obligated for SBV to launch positive solutions, making significant improvements on the operation of open market  Reserve requirements’ efficiency reinforcing 53 Bui Viet Trinh K15ATCA In the context that Vietnam has to get through the dollarization, reserve requirements keep playing an extremely crucial role in balancing the expected income between two types of asset, putting a limit on their volatilities which causes impediments for banking activities, diminishing the effectiveness of monetary policy In recent years, reserve requirements were modified to decline in both domestic and foreign currency This helped to cut down the business cost of banking system and to attract foreign currency from households to banking system Shrinking the amount of reserve requirement in VND should be carried out so that commercial banks can maximize their productivity of using available funds Moreover, CB’s ability to pay is secured to be safe based on accomplishing the insurance of required deposits for term deposits in VND Although this type of tool is significantly useful, SBV should not abuse this one It is clear that this kind of tool still presents its theoretical feature Additionally, if reserve requirements are constantly altered, the management of CB’s liquidity will be badly influenced 4.2.4.3 Supportive solutions from related parties  State-owned units In the long run, the Government needs to energetically encourage the development of institutions that provide information about market Besides, the Government should give special incentives to enterprises that operate in information service areas such as financial companies, auditing institutions Moreover, motivating the establishment of vocational organizations will help to connect enterprises in the same areas Sufficient information about customers and market plays a remarkably significant role in guaranteeing the quality of lending activities In addition, the collaboration of stateowned units in spreading information will assist administrative procedures to be quickly completed, cutting down expenses for enterprises and banks  Commercial banks 54 Bui Viet Trinh K15ATCA The situation in which banks have a redundancy of funds while companies have to suffer from the shortage of funds is relatively popular This is resulted from the fact that lending criteria of CBs is to enforce their clients to pay debts back rather than to boost their business performance Therefore, to remove companies’ difficulties in making loans, banks should consider following measures: Firstly, CBs should upgrade the system of customer evaluating and classifying It is necessary for CBs to figure out a method to calculate credit risks, then giving exact non-financial expenses CBs should not pay too much concern on decrees and certificates when making evaluations on enterprises’ capacity The business history of enterprises should be more thoroughly considered Secondly, CBs should put up the enterprise ranking system to shorten evaluation time Moreover, decisions on whether loans should be granted or not not depend on the size of enterprises which means that there should be no discrimination between big enterprises and small ones Thirdly, CBs should variably adjusted credit policies so that these policies are compatible with SBV’s regulations and the reality of market Furthermore, CBs should have favorable polices for loyal customers  Enterprises: One of the principal conditions of an effective interest rate policy is that funds are transformed from capital excess sources to capital shortage ones In other words, enterprises which have capital demand can get access to available sources of fund However, companies have to struggle with the process of gaining funds A variety of borrowing profiles are rejected due to the lack of business information, weak managing capacity, outdated technology, shortfall of high qualified labor force… As a result, enterprises should enhance their financial capacity by many different ways such as: accumulating maximum profit, raising contributing capital from members, cooperating with other enterprises 55 Bui Viet Trinh K15ATCA The issue that financial reports of enterprises not meet the clarity is one of the great obstacles for enterprises to get loans Therefore, enterprises should make trustworthy financial reports so that the procedures of borrowing can get much easier In conclusion, it is apparently crucial that SBV should concentrate on accomplishing combined chain of interest running strategies in order to satisfy two targets: inflation control and economic growth At the same time, the mechanism of setting up the base interest rate has to be enhanced in order that the market-oriented base interest rate can be put into practice Vietnam economy is going through the period of blossoming, accompanied with growth of the economy in the world It can be clearly seen that movements of financial market in the world can make great impacts on domestic financial markets Therefore, in the long run, it is essential to build the strong financial system with exact information provided The interest rate policy has to be set based on the principle: being stable in long term and being flexible in short term Admittedly, directing interest rate policy has to be attached to the goal of controlling inflation The effectiveness of indirect tools and the independence of SBV should be boosted as well Moreover, interest rate policy should coordinate with other policies, especially fiscal policy As a result, interest rate policy can lay a strong foundation to have favorable environment for investments, businesses and the growth of economy 56 Bui Viet Trinh K15ATCA CONCLUSION The interest rate is a mean of developing the economy, not the final goal of the economy Therefore, the interest rate policy must be linked to other economic policies, specifically the monetary policy and foreign trading policy The interest rate policy in the market economy must be changed depending on the market This means that these changes have to go along with stages of economic development and particular requirements set for each period in each country Setting up and implementing interest rate policy to meet the requirements of socioeconomic development is the direct mission of SBV and state agencies in the financial sectors However, to gain great success in the implementation of IR policy, it is essential to have cooperation between ministries and departments ranging from central ones to local ones In other words, conflicting decisions on interest rate policy should be seriously avoided As for the strategy of Vietnam economic development, the process of running and improving the interest rate policy should be given more attention The interest rate policy has to strictly follow the principle of the real interest rate, ensuring its flexibility in the economy 57 Bui Viet Trinh K15ATCA REFERENCES (n.d.) 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