Central bank inaction on gold fever can have severe economic impacts: economist

The sharp increase in gold and USD prices presents serious market stabilization challenges for the State Bank of Vietnam (SBV), writes Dr. Nguyen Huu Huan, an economist at the Ho Chi Minh City University of Economics.
Gold and USD prices have surged sharply, posing a challenge for the State Bank of Vietnam (SBV) since early this year. Part of the challenge is to stabilize the two markets without too much impact on the main macroeconomic goals.
After a short period of stability, gold prices have risen again to all-time highs. On Thursday, the price of SJC gold bullion increased to VND79.8-81.8 million ($3,236-3,318) per tael (buying-selling) and that of gold rings also set a new record of VND66.85 - 68.1 million ($2,711-2,762) per tael.
The gold fever among residents seems to be returning as other investment channels are not really attractive.
Deposit interest rates have dropped to a record low, the stock market is unstable and real estate still shows no signs of recovery. People are looking to gold with expectations that world prices will continue to rise when the U.S. Federal Reserve (Fed) begins to reduce interest rates in the second half of the year.
The increasing demand for gold among the population has had a significant impact on exchange rates. Although the SBV has strictly controlled the import of gold via official channels, smuggled gold can still enter Vietnam in many ways in the attempt to take advantage of the difference between domestic and international gold prices.
The rising exchange rates in the black market, by up to VND1,000 (4.1 U.S cents) per USD higher than the listed bank exchange rates, may prompt unofficial imports of the greenback as well as gold.
The gold and USD fevers have presented the SBV with a challenge right at the beginning of the year: how to stabilize them without much influence on the main macroeconomic goals of growth and inflation control.
A hasty or very slow response can have consequences for the economy, especially in terms of growth targets.
People withdrawing money to buy gold can reduce banks’ mobilized capital, affecting their liquidity. The average interbank interest rate has shown signs of increasing in recent times, which may indicate, in turn, that banks are no longer enjoying the abundant liquidity they did until recently.
If this trend continues, the deposit interest rate in market will increase, leading to rising lending rates, thus affecting the SBV’s goal of maintaining low interest rates to promote economic growth.
The increase in USD prices also greatly affects imports and exports, but the impact will be short-term because Vietnam is still a trade surplus country and the pressure to withdraw capital from foreign investors is not too big.

The sharp increase in gold and USD prices presents serious market stabilization challenges for Vietnam's central bank. Photo by The Investor/Trong Hieu.
The ‘goldenization’ of the economy and the strong return of the gold fever will cause many difficulties in managing the exchange rate policy in the near future when we lose a large amount of foreign currency to meet the demand for gold among residents (unofficial gold imports).
In times of stress, the central bank may have to use foreign exchange reserves to stabilize exchange rates. This would also mean that it would have to withdraw VND, exerting pressure on liquidity in the economy, which is in dire need of capital for recovery.
The SBV can implement a sterilization policy by buying valuable papers from commercial banks to continue pumping money into the economy. However money pumping and withdrawing in a non-synchronous manner can easily lead to short-term shocks.
In general, the impact of the gold fever on monetary policy and macroeconomic goals can upset plans set by the central bank at the beginning of the year. It can also directly affect fulfilment of the main goals of growth and inflation control this year.
While its impact on monetary policy as well as macroeconomic variables need not be severe, this would depend on the SBV sending clear messages and taking firm steps to stabilize the gold market in the near future.
Failure to do so will increase “goldenization” in the economy with bigger impacts on the financial market.
The trend of domestic and world gold prices continuously surpassing their peaks, which was expected to continue in the near future, presented huge risk potential. This would force the central bank to take strict measures.
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