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High liquidity, but no drop in interest rates

Update: February, 21/2017 - 09:47
Despite good liquidity in the banking system, the peculiarities in Việt Nam’s monetary policy management has prevented the decline of interest rates on deposits. — Photo cafef.vn

HÀ NỘI – Despite good liquidity in the banking system, the peculiarities in Việt Nam’s monetary policy management has prevented the decline of interest rates on deposits, a central economic report said.

The Party Central Committee’s Commission for Economic Affairs in its Việt Nam annual report in February 2017, entitled: ’2017 – Overcoming difficulties and continuing to develop’, said that it would be difficult to use inter-bank rate to impact the market interest rate due to the peculiarities in Việt Nam’s money and banking policy management.

According to the commission, there is a major difference in the monetary policy management of Việt Nam compared with other countries. The committee explained that in Thailand, Indonesia and many other countries, the monetary policy management is implemented in accordance with the inflation target. However, the monetary policy management in Việt Nam is for multi-purposes, including inflation control, foreign exchange stability and capital control.

It defeats these purposes, when there is pressure on foreign exchange rates, the commission said.

It has cited last year’s experience in the report. When the exchange rate increased sharply in the wake of US’s Fed interest rate rise, the central bank had to sell the US dollar and increase the interest rate of treasury bills to reduce the pressure on the foreign exchange rates. It caused a sharp rise in inter-bank rate.

Therefore, according to the commission, maintaining low interest rates in the inter-bank market triggers instability, and it will be a barrier to the commercial banks unwilling to lower interest rates (mainly long-term rates).

Besides this, excess liquidity in some banks does not easily flow into other banks that are short on liquidity and do not have good asset quality. According to the committee, it is difficult for the latter to borrow from the first, unless they have secured assets such as G-bonds.

Therefore, the latter must increase interest rates to higher levels than the average rates to be able to attract depositors.

This year, the central bank has targeted keeping the interest rate stable, but some commercial banks inched up deposit interest rates in the first month of the year.

However, the central bank said the rise was only in some small-sized banks and did not reflect the common trend of the entire banking system. It affirmed that interest rates were stable in the first month of 2017 and would remain steady for the entire year.

Currently, deposit interest rates average at 0.8 per cent to 1 per cent per year for below one-month terms, 4.5 per cent to 5.4 per cent per year for one-month term to six-month terms, 5.4 per cent to 6.5 per cent per year for six-month terms to 12-month terms and 6.4 per cent to 7.2 per cent per year for terms exceeding 12 months. — VNS

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