Gradually decreasing pressures on interest rate increases

	State Bank works to maintain stable interest rates
	“Hidden” pressures of interest rates
	State Bank: Interest rates remain stable

Gradually decreasing pressures on interest rate increases

Vietnam's current interest rates are at a relatively reasonable level with macroeconomic correlations. Photo: ST

Stable

In recent times, deposit rates increased to a local rate of 0.1-0.3% depending on the maturity date, accordingly raising the maximum deposit rate for the 18 month- term to 8.2. % per year. However, this increase occurred only in small banks. For the whole system, the deposit interest rate has not changed much compared to the beginning of the year.

Talking about the reason for the increase of local deposit interest rates in some banks, experts of Vietcombank Securities Company Limited (VCBS) said that these banks aimed to raise capital and meet the safety ratio as prescribed in Circular 36/2014 / TT-NHNN regulating the safety limits and ratios for transactions performed by credit institutions and foreign branches of the State Bank. Besides, the pressure from the liquidity shortage due to the interbank interest rate always kept at high level that makes difficulties for these banks in accessing capitals in the interbank market.

In addition, in the first four months of 2017, credit grew better than it in the same period (as of April 20, 2017, credit in the economy rose 4.86% from December 2016, highest level in the last 6 years (the same period last year increased only 2.99%), meanwhile the total deposits of customers in credit institutions increased by 3.39% over the end of 2016 (the same period last year increased by 4.01%) making the difference that causes the demand for mobilization in some banks increased.

At the Conference between the Prime Minister with enterprise on May 15, 2017, the State Bank of Vietnam Governor Le Minh Hung commented that the deposit and lending interest rates have moved stably from 2016 to Now, especially since the end of September,2016, some credit institutions have reduced 0.3-0.5% per year for deposit rates, down 0.5-1% per year for lending interest rates for business and production and priority sectors. Thus, the current interest rate level has fallen sharply (only 40% of the interest rate at the end of 2011 in line with the operation objective, currency and inflation movements, while ensuring the harmonization of interests of depositors, borrowers and credit institutions.

In particular, the SBV governor explained that the lending rates of some countries in the region such as Japan and China are low because their inflations have been restrained at a low level, their macroeconomic is stable and their enterprises are good at forecasting and making business plan; the capital sources are not too dependent on bank credit. Meanwhile, Vietnam has many unfavorable factors affecting the interest rates such as bad debts, big dependence on bank capital, expectations on high inflation and exchange rates. However, compared to some regional countries such as Myanmar with the lending rates at 13% per year, Indonesia with the lending interest rate at 11.9% per year, Thailand at 6.3% per year, Singapore at 5.4% per year, the Vietnam’s lending interest rate in VND of about 6-11% per year, and the interest rate in foreign currency of 3-4% are still relatively reasonable with macroeconomic correlation.

Reducing pressures

Mr. Nguyen Minh Tuan, Director of the Hanoi Branch of the SBV has recently shared that not only enterprises but also banks want to reduce the interest rates. As a result, the SBV governor has called on commercial banks to reduce the lending interest rates by not imposing administrative measures but by basing on capital, the ability to reduce costs and deal with bad debts of each bank to try to reduce interest rates.

The above solutions to implement the call of the Government to carry out the economic growth objectives. The Government has assigned the SBV to conduct the solutions to stabilize the interest rate level in accordance with the performance of macroeconomic, inflation and monetary market on the basis of controlling inflation, stabilizing the foreign currency market and striving to reduce the lending interest rate and boosting the credits right from the first months of 2017 against the accumulation in the last months of the year.

Mr. Dinh Tuan Minh, Chief Executive Officer of MarketIntello, member of the founding board of the Institute for Economic and Policy Research forecasted that the inflation of the whole year will reach 3.8%. Increase in electricity prices will possibly push up the inflation from the third quarter, but weak domestic demand will keep the inflation under control in the National Assembly’s targets. Moreover, the stable performance of the exchange rate in the recent time showed that the SBV has and will resume to buy foreign currencies to be supplement the foreign exchange reserves. With the purchase of foreign currency, the same as in 2016, the State Bank will simultaneously release VND into the market, causing the VND not to be depreciated against the loss of price and cool down interest rates.

For these reasons, Mr. Dinh Tuan Minh stated that the interest rate level decreased by 0.5 percentage point compared to 2016 depending on each term. The short-term deposit rates were expected to fall to 4.5% for the 3-month term and 6.3% for the 12-month term thanks to the inflation control of the SBV and the Government.

Agreeing with the opinion of Mr. Dinh Tuan Minh, the VCBS also reported that the SBV still has capital to regulate the market and maintain the interest rates at low level to support growth in the context where the foreign exchange market is gradually stabilized again after the Fed's latest interest rate increase in March, 2017, the interest rates are forecasted to be relatively stable and have less movements in the second quarter. However, in the second half of 2017, the risk from the exchange rate is likely to heat up again and the pressure on interest rates will increase.

Although it is assumed that the interest rates for the rest months of 2017 will face more challenges than 2016, the National Financial Supervisory Commission said that the lending interest rate would be stable if the settlement of bad debts and the restructuring credit institutions were strengthened. In addition, the difference in the interest rate between USD and VND must be kept at a reasonable level. Expectations on inflation at an average of 4%, the exchange rate an increase of 2-4%, the current deposit interest rate (above 12 months) of around 7% is still good for VND. Meanwhile, the interest rate difference between USD and VND loans is about 5.2%, the interest is on VND loans.

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Although there are many forecasts of pressure on interest rates, the fact that monetary movements in the first months of 2017 have been more stable and harmonious due to the policies and determination of the Government and the SBV in the recent times. Therefore, these efforts need to be further strengthened so that the result will not stop at the striving, but must be actual reductions to support the production and business activities of enterprises and economic development target.