Lao central bank to keep rates unchanged despite rising inflation

Lao central bank to keep rates unchanged despite rising inflation

The Bank of the Lao PDR expects to keep its monetary policy unchanged despite rising inflation.

According to a central bank official in charge of monetary policy, the bank's policies do not cause inflation so it is not necessary to make any changes to reserve requirements and loan interest rate policy.

“The inflation we face today is due to external causes such as flooding and rising production costs,” he said.

The Bank of the Lao PDR reports on its website that inflation in December reached 7.70. In 2011 the average inflation rate was 7.58 percent while the GDP value was projected to see an increase of about 8 percent.

The increasing inflation rate has created wide speculation among the public about how people actually benefit if they earn more money but also have to spend more.

The government last year approved an increase in the minimum wage from 340,000 kip to 620,000 kip, but people still complain that their purchasing power has not increased because prices continue to rise in markets.

The central bank official said the Bank of the Lao PDR would not force commercial banks to increase their foreign reserve requirement rate to curb inflation because this would put added pressure on investment and productivity.

Commercial banks are required to hold 5 percent of their reserves in kip and 10 percent in foreign currencies.

The bank official also said that higher reserve requirement rates would prevent commercial banks from issuing loans to businesses so they could expand and boost their production capacity, which could lead to supply shortages.

The central bank wants commercial banks to inject money into businesses so they can increase production capacity to ensure a regular supply of goods, which helps to keep prices low.

Commercial banks would also have to shoulder heavy deposit interest rates if they could not issue loans to investors.

The official also said the central bank would not increase its loan interest rate, which has been at five percent for less than 1 week, 6.5 percent for more than 1 week, and 12.5 percent for a period of two weeks to 1 year.

The central bank made the latest interest rate adjustment in September 2010.

According to the official, mo ney supply saw a 25 to 30 percent increase compared to the previous year, which is consistent with GDP growth. The increase in money supply was due to the inflow of foreign investment funds.

The Bank of the Lao PDR does not require commercial banks to stop issuing loans for private property construction as is the case in many countries. Despite the boom in real estate projects, the number of loans provided to this sector is small.

It is commonly accepted that people in Laos do not invest in production but much prefer to build their savings through real estate development, which leads to a rise in food prices.

vientiane times