Central bank makes strong intervention into foreign currency market

In an expected move, the State Bank of Vietnam this morning, November 25, decided to raise the basic interest rate and adjust both the official exchange rate and trading band.

Analysts say the central bank has chosen to take drastic measures to stabilize an overly hot market instead of taking more gradual, smaller steps.

A series of decisions were released by Governor of the State Bank of Vietnam Nguyen Van Giau this morning. From tomorrow, November 26, 2009, the interbank dong/dollar exchange rate will be raised to the new level of 17,961 dong per dollar, a sharp increase of 5.44 percent over today’s rate.

The State Bank of Vietnam has also decided to narrow the trading band from the current five percent to three percent. The trading band of three percent means that the exchange rate quoted by commercial banks must not be higher or lower by three percent in comparison with the official interbank exchange rate.

It is obvious that the central bank is trying to curb the sharp dollar price increases, because with the lower trading band, banks will not be able to offer overly high dollar prices in transactions

This means the exchange rate to be quoted by commercial banks tomorrow will not be higher than 18,500 dong per dollar, while it is 17,885 dong per dollar today.

Governor Giau admitted that the foreign currency is now overly hot and it is necessary to take urgent and drastic measures to intervene in the market.

Also this morning, the State Bank of Vietnam also released the decision to raise the basic interest rate to eight percent per annum which will be applied as of December 1, 2009. This is an unexpected move. Prior to this, the central bank announced that the basic interest rate would be kept stabilized at least until the end of the year.

The seven percent per annum interest rate has been applied for the last 11 consecutive months.

With the new basic interest rate, the ceiling lending interest rate will be 12 percent per annum, instead of the current ceiling of 10.5 percent which has been viewed as low.

Explaining this, Giau said raising basic interest rates is a measure that will help ease the current fast credit growth. By the end of November, the total outstanding loans had increased by 34 percent over the same period for the previous year, or four percent higher than the targeted growth rate set for the whole year 2009.

Besides, Giau believes, curbing the credit growth will also help ease pressure on the exchange rate.

The State Bank of Vietnam has also decided to raise the refinancing interest rate from seven to eight percent per annum and rediscount the rate from five to six percent – both also take effect from December 1. This will also strive to limit loaning, because it will make the capital cost increase.

The decisions were released in the context of the hot foreign currency market and rapidly increasing credit. Businesses complain that they cannot purchase dollars from banks at quoted prices. The dollar price reached 19,850 dong per dollar yesterday.

Giau said the measures had been decided after the Government’s meeting yesterday evening.

The Ministry of Finance may also consider raising import tariffs, while the Ministry of Industry and Trade will take measures to limit imports of unnecessary products. The Prime Minister himself will urge state owned corporations and groups which have earnings in foreign currencies to sell foreign currencies to banks.

VietNamNet/VNE

Tags: vietnam bank, Vietnam business news, Vietnam finance news