Banks’ response to US Federal Reserve rate hike
Two days after the US Federal Reserve on December 14 increased the US dollar key interest rate from 2% to 2.25%, domestic commercial joint stock banks have not yet made any move however they said that they are waiting for a pre-emptive response from state bank heavyweight Vietcombank-HCM City.
It is reported that Vietcombank next week will raise interest rates of US dollar deposits by at least 0.2%, according to Nguyen Phuoc Thanh, director of Vietcombank’s HCM City. Presently, the interest rate of 12-month US dollar deposits of Vietcombank-HCM City is 2.4% per year.
Currently, interest rate of the US deposits at commercial joint stock banks stays around 2.4% per year, Export and Import Commercial Joint Stock Bank (Eximbank) has the highest interest rate for 12 month US dollar deposits of 2.55% per year. If Vietcombank’s HCM City branch follows the US Federal Reserve by raising the US dollar deposit interest rate by at least 0.2%, at that time the interest rate for 12 month US dollar deposits will be 2.6% per year, accordingly bringing about adjustment of the US dollar deposit interest rates of other banks.
Thanh cited three reasons for this move of Vietcombank’s HCM City arm: Firstly, over the last time, interest rate of the US dollar deposits was too low while total deposit balance into banks was lower than anticipated. Thus interest rate adjustment is needed to raise more investment capital for the economy especially as loan demand increases at year-end. Secondly, Vietcombank in September increased the US dollar interest rate because Vietcombank projected that the US would maintain the US basic interest rate at 2%, nevertheless the US now raised the US dollar interest rate to 2.25%. Thirdly, Vietcombank forecast the US will further increase the US dollar interest rate in 2005, the next increase in the US dollar deposit interest rate of Vietcombank’s HCM City will be based on such anticipation in a bid to avoid repeated adjustments of interest rates.
It is projected that from now until the end of 2004, dong deposit interest rates will not present any sharp changes. This statement can be explained by the following reasons: the negotiation on limit of dong deposit interest rate for 12 months at 0.63% per month among state owned commercial banks is still valid while these banks account for two thirds of the deposit market share. Moreover, in an effort to keep interest rates at a low level, the State Bank of Vietnam (SBV) via the open market operations (OMO) pumped a relatively big capital amount into commercial banks by repurchasing valuable papers, which had been bought by commercial banks previously. This helped relieve pressure on banks to increase dong deposit interest rates by commercial banks. But nonetheless, state owned commercial banks increased dong deposit interest rates, for example, Bank for Agriculture and Rural Development (Agribank), Bank for Investment and Development of Vietnam (Bidv)-Saigon branch launched a lottery based savings programmes to draw in more depositors, and the transaction office 2 of Industrial and Commercial Bank (Incombank) increased its interest rate by 0.1% for dong for deposits worth more than 50 million dong.
However, commercial banks said that it is impossible to anticipate what will happen to dong deposit interest rates as the new year approaches. Presently, commercial banks are in need of large amounts of capital for the substantial rise in payments from the end of this year until mid-February 2005 during the Tet holidays. Developments in the OMO has shown this to be true. Specifically, commercial banks continuously sold valuable papers for dong, in the Treasury bill market, only few banks bought T-bills, saying they had to set aside ample cash for the outward payment spike. At the same time, capacity of raising capital from the individual deposits is restrictive while loan demand is soaring. On the other hand, the possibility that the US will raise the key interest rate to 3.75-4% next year because of inflationary pressure will undoubtedly result in added pressure on dong deposit interest rates.
Category: Finance
