Interest rates unlikely to go down

The State Bank of Vietnam (SBV) confirmed that it would continue with a tightened monetary policy in a prudent and flexible manner in accordance with Government’s monetary policies.

The State Bank of Vietnam (SBV) confirmed that it would continue with a tightened monetary policy in a prudent and flexible manner in accordance with monetary policies stated in the Government’s Resolution No. 11/NQ-CP dated February 24, 2011 and Resolution No. 83/NQ-CP dated June 5, 2011. Although interest rates have shown signs of easing, a significant decrease in interest rates is unlikely in the near future.

After the central bank lowered the interest rate it charged for loans in open market operations (OMO) by 100 basis points to 14% from 15% on July 4, the stock market immediately rebounded in a prolonged downtrend on hopes that the central bank would ease monetary. However, the State Bank confirmed that this solution was just a flexible OMO regulating tool for daily operations and this was completely in line with the guidance of tight, cautious and flexible monetary policy. This was not a policy signal.

The SBV said liquidity at the banks was profuse, interbank rates were relatively stable at 12 – 13% per annum, and interest rates for Vietnamese dong deposits tended to ease.

The OMO rate cut – the first time since November 2010 – helped commercial banks to access cheaper capital sources. On the interbank market where banks borrow money from each other, interest rates have also dipped. Since the start of July, overnight lending rates in Vietnamese dong on the interbank market have been hovering at 11% per annum, a sharp decline from the end of June. Rates on longer terms also slipped significantly. On the interbank market, rates for 12-month loans touched the ceiling of 14% per annum at the end of June but eased to 13.50% now.

These developments indicate that liquidity at banks has been improved and competitive pressures on deposit rates gradually cooled down as a result. In recent days, some banks have lowered rates for VND deposits to below 14% per annum, including Saigon Commercial Joint Stock Bank (SCB), Vietnam Export Import Commercial Joint Stock Bank (Vietnam Eximbank), Asia Commercial Bank (ACB) and Vietnam Technological and Commercial Joint Stock Bank (Techcombank) although the cut was minor. However, it is just the upside of interest rate story because actual rates are higher than quoted ones. Banks and depositors continue negotiating deposit rates. According to an official from a leading commercial joint stock bank the margin on implicitly negotiated rates also began to decline by 1 – 2% per annum from June and this trend tended to continue in July.

Patrons or depositors with large-value accounts can negotiate rates with banks and the margin in relation to official rates usually comes in the form of bonuses or promotions. Deposits worth less than VND100 million are still subjected to publicly quoted rates. At large banks, when savings reach maturity, interest rates are also reduced while this is not the case at smaller lenders because they do not have as many as competitive edges as bigger ones. As often as not, small banks usually kicked off rate races and they are often the last to cut rates. Current, negotiated rates are standing at 17.5% per annum for one-month term deposits.
At present, banks cannot take the lead in cutting rates because they still want to keep mobilised capital with them. As a result, rate cuts are very small.

Another reason for slow rate cut is the threat of escalating inflation. The consumer price index eased in July but the surge in food prices in July was estimated to be translated into the July inflation. As a rule, inflation and interest rates are proportional to each other; high inflation will lead to high interest rates, and vice versa. With inflation growth anticipated for the whole year at 17 to 18%, many expect the rate will be brought down soon.

Despite forecasts of high inflation, interest rates are still showing signs of moderation. Interest rates were pushed up by illiquidity. However, the rate race was hammered out when the State Bank of Vietnam intervened.
Nonetheless, interest rates are unlikely to go down further this year because CPI is impossibly below 17% this year. When the Government said it strived to curb CPI growth at 15% to 17% for the whole year, experts pointed out that this was already very high rate. Mr Nguyen Duc Thang, Director of Price Statistics Department under the General Statistics Office (GSO), said: CPI was expected to rise between 2.5% and 3.9% in the last six months. In the remaining months of 2011, consumer prices tend to increase but at a slower pace and the cap of 17-18% is reachable. If the central bank eases monetary and lowers interest rates, inflation will accelerate. Moreover, there is still a wide room for credit growth as it rose only 7% in the first half out of the target of 20% this year. If credit growth picks up the pace, it will immediately impact CPI.

The Government reinstated its pursuit of inflation taming while the central bank confirmed to continue with a tight, prudent and flexible monetary policy. Consequently, interest rates cannot fall down as quickly as expected by businesses

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