High CPI increase in April makes interest rate decreases impossible

Finance and banking experts believe that with the measures to stabilize the foreign currency market, the dong/dollar exchange rate would be stabilized in the upcoming months. However, the dong interest rate would not decrease right now, because of the high consumer price index (CPI) increase in April.

The CPI reportedly increased sharply by 3.32 percent in April, raising the total CPI increase in the first four months of the year to 9.64 percent, which has far exceeded the “quota” set earlier this year by the National Assembly at seven percent.

The high CPI increase in April has raised worries that the inflation rate would be at a “galloping level” by the end of the year. Experts have pointed out that it will be impossible to slash interest rates as expected by the government and enterprises until the worry about high inflation still exists.

“The increasing inflation has been causing big difficulties for the production and business of enterprises and big worries among people,” reported by the Ministry of Planning and Investment on April 26.

As such, the weight of worry on high loan interest rates has not been lifted from enterprises. In fact, the government soon realized that high interest rates have been burdening enterprises and hindering production. Therefore, the State Bank of Vietnam has instructed commercial banks not to pay more than 14 percent per annum for Vietnam dong deposits. Once banks do not have to pay such a  high rate for mobilizing capital, they would be able to slash lending interest rates.

In fact, the deposit interest rates being paid by commercial banks are much higher than 14 percent per annum. The high inflation rate in the first months of the years has led to the fact that depositors expect high interest rates. Meanwhile, commercial banks also have to pay high interest rates to ensure real positive profits for depositors, or people, who have idle money, would refuse to make deposits at banks.

Bankers hope that the latest decision by the central bank to set a cap of three percent per annum on the dollar deposit interest rates would help banks improve the liquidity, and have a good impact on the dong interest rates. Over the last two weeks, since the ceiling interest rate of three percent has been applied for dollar deposits, many people have sold dollars for dong and deposited dong at banks.

However, Bui Tan Tai, Deputy Director of Asia Commercial Bank ACB said on Dau tu, that it is too early to conclude that this is a growing tendency, and that one should wait for some more time before making final conclusion.

Tai added that he still cannot see any signs showing that there would be improvement in the mobilized capital in Vietnam dong, and that bankers still find it very difficult to attract capital.

To Huy Lam, Deputy Director of the HCM City Branch of the State Bank of Vietnam said when attending the shareholders meeting of HD Bank several days ago, that the capital mobilized by the banks in HCM City has decreased by 2.6 percent, while the outstanding loans have increased by 3.4 percent.

“With the pressure of high inflation, it is now still impossible to ease the interest rates to the expected levels,” Lam said.

Dr Tran Du Lich, Member of the National Advisory Council for Finance and Monetary Policies, also said that in the context of high inflation, depositors expect the interest rates higher than the currently applied ceiling rate of 14 percent.

He has urged businesses to reconsider their business plans in 2011, once the lending interest rates have not decreased as expected.

However, Lich has reassured businesses that the inflation rates would decrease towards the end of the years, which will pave the way for the dong interest rates to go down, possibly from the end of the third quarter.

Meanwhile, Thoi bao Kinh te Vietnam has quoted Nguyen Tien Thoa, a senior official of the Ministry of Finance, as saying “that the inflation rate would begin going down from the end of the second quarter.” – Vietnamnet

Tags: Vietnam banking industry, Vietnam finance, Vietnam financial, Vietnam interest rates