Bank Interest Rates in 2011: 'Observing' and 'Expecting' Signals from Inflation

The interest rates will drop after the Lunar New Year. It is a common statement by many financial and banking specialists. At the time, many enterprises in Vietnam, especially small and medium enterprises have no long standing investment plan at all and their financial fund sources mainly come from banks. So, these enterprises are not hurried to get loans. Meanwhile, the greatest part of residents will put the money which they draw back at the year end and have no plan for it yet, into banks for quite high interest rates, reaching 14 % as the present time. 

 

According to Ms Cao Thi Thuy Nga, Deputy Director of Military Bank, the mobilisation by commercial banks is often better in the beginning of the year; this will help to improve the Markey liquidity. She said “At that time, commercial banks just start their new business cycles, thus the pressures of credit growth limit is not in the concerns. As a result, commercial banks often try their best to deploy lending agreements with lower mobilisation sources.

 

But the most important concern by enterprises that is not easy to be handled at the moment, is whether or not bank interest rate will be lowered after the first quarter of 2011. According to Mr Tran Du Lich, an economic specialist, bank interest rate cannot divorce from consumer price index (CPI). If real interest rates are unlikely positive or deposit rates are not higher than CPI, commercial banks will unable to attract funds from residents. He said “interest rates are always in close relation to CPI. It means the concern of CPI must be handled before the issue of interest rates. And, it is difficult to handle the concerns about interest rates if the inflation issue is still in question.

Ending the year of 2010, the inflation rate climbed to the rate of 11.75 %. Before the concern about Vietnamese dong depreciation, many local residents have transferred to keep gold or foreign currencies or put their money into bank deposits for high interest rates instead.   At present, the difference between the deposit rates and CPI is seen approximately 3.25 %. However, the number is greater in reality because some commercial banks try to attract depositors with promotion programmes of giving bonus rates.

 

The interest rates depend on CPI; meanwhile this index is mainly affected by the fiscal and monetary policy management tools of the government and state bank. The CPI target for the year of 2011 is not over 7 %. However, according to Doctor Vo Tri Thanh, Vice Director of the Central Institute of Economic Management, the inflation rate can hardly be lower than 8 % if the growth of gross domestic product (GDP) remains at the rate of 7 %. He also quoted the analysis of Standard Chartered Bank that the inflation rate would be over 10 % if the growth of GDP was 7.5 %. lower than 8 % if the growth of gross domestic product (GDP) remains at the rate of 7 %. He also quoted the analysis of Standard Chartered Bank that the inflation rate would be over 10 % if the growth of GDP was 7.5 %.

 

In 2008, Vietnam economy was in recession, the deposit rate reached 18 % per annum while the lending rate soared to the rate of 22 to 24 % per annum and it strongly decreased in 2009. However, it does not mean that the situation will be the same in 2011.

 

With the current situation, it is appeared that there have been existence of many price pushing factors, especially the pressure on the price rise of important input commodities in the field of production such as electricity, coal, petroleum (With world economic recovery, theCentre for Global Energy Studies (CGES) forecasted that oil prices were most likely to approach US$100 per barrel (dpb) in 2011). This will lead to the rise of many other important goods such as foods, construction materials, transportation services. were most likely to approach US$100 (dpb) in This will lead to the rise of many other important goods such as foods, construction materials, transportation services.

Ms Nga, Deputy Director of Military Bank, also further stated that to handle the concern about the interest rates, the macroeconomic policy issues must be handled at first, notably the concerns about the foreign exchange rate and inflation. When inflation is under control, people will have more confidence in Vietnam dong and they will not try to keep gold or foreign currencies like in 2010.

What factors can we rely on beside the control of CPI? The answer is “yes”, but it is only a supporting factor, not the determinant. MrCao Sy Kiem, ChairmanofSMEsVietnamAssociation shared that banks should share beneficial interests with enterprises with a view to bring the difference between lending and deposit rates back to a proper level, avoiding the situation that banks get benefits while enterprises are in vulnerability with high capital costs., ofSMEsVietnamAssociation shared that banks should share beneficial interests with enterprises with a view to bring the difference between lending and deposit rates back to a proper level, avoiding the situation that banks get benefits while enterprises are in vulnerability with high capital costs.

 

In addition to this issue, Mr Nguyen Van Giau, the State Bank Governor, stated that the current difference between lending and deposit rates was only 2.5 % compared to the common difference of 2.2 to 2.5 %. So, the operation of banks would face with difficulties if the current difference was adjusted narrower. Thus, with the acknowledgement by the State Bank of Vietnam (SBV), the difference between lending and deposit rates will only decrease 0.3 % more in 2011.

 

In the short term, according to Ms Nguyen Thi Nguyet Huong, Chairwoman of Vietnam Investment Development Group (VID Group), it seems to be successful if the deposit and lending rates are controlled in turn at 14 % per annum and 16-17 % per annum because there have ever been implicit negotiations between banks and depositors with higher interest rates compared to the consensus level committed by banks. These doings lead to the rise of lending rates and the interest burden shall be put on enterprises, not banks.  

 

Another solution which can be used for this issue is to improve the liquidity of banks. Ms Nga, Deputy Director of Military Bank, mentioned that small banks can hardly mobilize funds from interbank market if SBV provides too strict regulations. To assure the liquidity, small banks have no choice but mobilize funds from external market with high interest rates and this brings about the rise in interest rate level.

 

There have been many times SBV pumping more capital via open market operations, but only banks with good financial capacity could get more capital while small commercial ones seem to be unable to access this capital. According to Ms Nga, SBV should necessarily make internal adjustments for the common interest. Concretely, SBV should put forth a proper mechanism so that small banks can access this type of capital via open market, avoiding the rise in deposit rates at any cost.