Inertia over US Federal Reserve’s rate hike

31-Mar-2005 Intellasia | 30/Mar/2005 Dau Tu page 7 | 1:30 PM Print This Post

Following the widely expected move by the US Federal Reserve to raise its key interest rate by 25 basis points from 2.50% to 2.75% a year did not cost Vietnamese analysts much time to discuss it saying the move has not resulted in any significant impact on the domestic currency market.
It is said that the State Bank of Vietnam has recently lifted the deposit interest rate cap of legal entities at credit organisations by 0.2-0.3% to 0.3% for demand deposits, 0.7% for less than six month deposits and 1% per year for more than six month deposits and that Vietnam International Bank (VIBank) has announced it will hike US dollar deposit interest rates by 0.2% to 3.3% for 12 month terms saying it has nothing to do with the US monetary move.
Even though the US Federal Reserve has increased its rate seven times since June, 2004, the domestic forex market is still stable as attention has shifted to other hot topics such as the rising crude oil price, gold and the US dollar. The question now is whether US Federal Reserve’s will make its 8th, 9th, and 10th increase of its key rate. According to Hoang Hong Hanh, chief of Vietcombank’s capital department, that the US Federal Reserve’s again increased the key rate was not considered that significant as it was anticipated and therefore has not impacted the domestic market. Prior to the US Federal Reserve’s move, Vietcombank had driven up US dollar deposit interest rates. Whether Vietcombank will continue to lift US dollar interest rates or not will depend on local market developments and the capacity of capital supply and demand of each commercial bank itself.
Nonetheless, continuous increases of the US key rate will impact the domestic market because since the rate rose from 1% a year last year to 2.75% currently, domestic US dollar deposit interest rates have kept track. Before the Tet Lunar New Year holidays, that is before the US Federal Reserve raised its interest rate for the sixth time from 2.25% per year to 2.5% per year, some commercial banks had prepared to push up interest rates, thereby driving up average US dollar deposit interest rate level to 3.0-3.3% per year for 12 month terms.
So the question is far the US dollar interest rate will go on in the near future. As inflation is creeping up in the US coupled with high crude oil prices, it is likely the US Federal Reserve will continue to hike its key rate to control inflation. Most analysts forecast the rate will be increased again to 3% in May.
If all domestic commercial banks from state owned commercial banks to commercial joint stock banks immediately raise US dollar deposit interest rates following any US move, dollar deposits will rise and dong deposits slip. This may do more harm than good. Last year after the US Federal Reserve started to lift the base interest rate, many domestic commercial banks were reluctant to raise US dollar deposit interest rates thereby leading to changes in dong and US dollar deposit ratios. Many bankers projected that changes in dong and US dollar deposit ratios this year will be far greater although the SBV is seemingly unperturbed about this.
In fact, it is not always that whenever the US Federal Reserve raises its interest rate, local people automatically switch from dong to US dollar deposits at banks because this depends on the perceived stability of the domestic currency, particularly central bank monetary policy.
The SBV projected that although the US Federal Reserve might increases its rate to 4.0% or more this year would still cause no great change in dong deposits of domestic commercial banks.

 


Category: Finance

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