Interest rates under pressure

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	Duality of interest rate ceiling removal
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Illustrative photo.

Specifically, according to a senior official of the State Bank of Vietnam, credit growth at the end of February 2017 was approximately 2% compared to the end of 2016 while in the same period of 2016 and 2015, the credit growth was around 0.6%. The credit structure has continued to be stable since December 2014, with short-term credit accounting for 45% of total credit; medium-term and long-term credit accounting for 55% of total credit.

The report of Bao Viet Securities Company indicated that credit growth was quite positive while the liquidity of the banking system was not abundant, which made the mobilization of interest rates slightly increase, mainly in small and medium commercial banks. Specifically, Maritime Bank increased interest rates for short-term (1- 2 months) from 5.05% to 5.2% per year; Oceanbank increased interest rates for 6-month, 11-month and 12-month terms to 7.3% per year and OCB raised deposit rates to the highest level of 7.8% per year.

In addition, interest rates have increased because commercial banks balanced and rearranged the capital structure as stipulated in Circular 06 on reduction of the use of short-term loans for medium and long-term loans from 60% to 50% (officially taking effect from the beginning of 2017).

In addition, inflation pressure in the first two months of 2017 (a total increase of 0.7%) was also a factor for banks to consider adjusting interest rates when depositors' expectations changed.

According to Bao Viet Securities Company, external pressure from the plan of the Fed has put pressure on increase of interest rates. After the decision to raise interest rates on 15th March 2017, the Fed will have two times of raising interest rates this year and 3 times of raising interest rates in 2018. If the ceiling of interest rates on foreign currency deposits in the country remains at 0%, it is possible that remittance and indirect investment will have a reversal. As a consequence, the exchange rate will fluctuate again and if the State authorities want to prevent the fluctuations, interest rates of vnd should be attractive enough for depositors to hold vnd despite expectations of exchange rate fluctuations.

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In general, Bao Viet Securities Company believes that the pressure to increase interest rates this year will be higher than that in 2016. However, this pressure may not be too great if CPI cools down and the roadmap of the Fed’s interest rates is still in line with expectations of investors.