Central Bank Tightens Monetary Policy

Source: Vientiane Times

The Bank of the Lao PDR (BOL) has made changes to its reserve requirement level and base interest rate, as announced by the bank’s governor.

The move is aimed at reducing the amount of money in circulation and curbing the spiralling inflation rate, which was recorded at 9.9 percent in April.

Governor of the Bank of the Lao PDR, Mr Sonexay Sithphaxay, recently signed a two-page BOL Decision regarding the adjustment to the bank’s reserve requirement.

Under the decision, the kip reserve requirement will increase from 3 to 5 percent, but will remain at 5 percent for foreign currencies.

The decision is aimed at ensuring the financial liquidity of the banking system and minimising the risks that could impact the banking sector, while regulating and sustaining the quality of credit to reflect the reality of the macroeconomic situation.

Raising the reserve requirement means that the central bank can reduce money supply, which should enable it to better control money supply and curb inflation, as well as respond to the nation’s economic woes.

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Over the past two years, the central bank has made two adjustments to its reserve requirement level in response to the changing needs of the country’s fiscal situation.

In March 2020, the BOL cut the kip reserve requirement from 5 to 4 percent, and from 10 to 8 percent for foreign currencies.

Last year, the bank made another change to its reserve requirement by reducing it from 4 to 3 percent for kip and from 8 to 5 percent for foreign currencies.

With regard to the policy rate change, the bank increased the base interest rate for loans of less than 7 days from 3 to 3.1 percent, for loans issued in kip.

In addition, the bank cancelled the interest rate on 7-14 day loans and the interest rate on loans issued for periods of 14 days to one year.

The bank said the adjustment to the base interest rate would serve as an important reference for commercial banks in following the new policy rate.

In theory, if a central bank increases the base rate, commercial banks also increase their interest rates and borrowing becomes more expensive.

In March 2020, the BOL lowered its base interest rate for loans of less than 7 days from 4 to 3 percent, for 7-14 day loans from 5 to 4 percent, and for 14-day to one-year loans from 10 to 9 percent.

The main challenges facing the government are the continuing depreciation of the kip and mounting debts, which are causing severe economic damage.