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| Deposit rate cap may be lifted in July |
| 30-APR-2008 Intellasia | Reuters |
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| 30 Apr, 2008 - 7:03:00 AM |
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Vietnam could ease its restrictions in the next few months on banks' ability to raise interest rates on deposits, despite steep inflation, to help relieve pressure on smaller lenders.
Major banks kept overnight dong loan rates between 5% and 10% on Monday, unchanged from a week ago but wider than the range of 4% to 7% at the end of March.
Rates on their six-month loans widened to a range of 10% to 13% on Monday, from 10% to 11% last Monday.
"Lending rates on the interbank market remain high, which may suggest that liquidity would worsen," said economist Tong Minh Tuan at the Research & Advisory Department of IPA Investments.
The banks could be allowed to set their own rates from July, while raising dong deposits, instead of having to keep to an 11-% cap, a central bank official said.
"The State Bank could maintain the current ceiling on deposit interest rates for the next couple of months and would remove it after June," Le Xuan Nghia, head of the Banking Development Strategy at the State Bank of Vietnam, or the central bank, said.
The central bank has carried out various measures to tighten monetary conditions as inflationary pressures have increased. These included boosting official interest rates and raising compulsory reserve levels for banks.
Keeping the ceiling in place beyond July would make it difficult for smaller banks to raise funds and tighten their liquidity, which may prompt the need for a central bank rescue, Nghia said in a weekend report on the government's website.
Annual inflation in April jumped to 21.42%, the sixth consecutive month of double-digit inflation. Monthly inflation data is not fully available but the latest level could be the highest since 1991, when Vietnam reported an annual inflation rate of 67.5%.
Some economists suggested price changes between months showed signs that price pressures were easing. Monthly inflation dropped below 3% in April and March from more than 3% in January and February. However, the data is not seasonally adjusted.
Commercial banks raised dong deposit rates to 14% in February to avoid tight liquidity as the central bank tightened monetary policy.
But the central bank intervened by imposing a cap of 12% on February 26. Banks then cut the ceiling to 11% from April 2, a decision mediated by the Vietnam Banks Association.
A central bank statement issued last Friday said apart from injecting cash via open market operations, the central bank would step up lending especially to smaller banks.
But banks liquidity in Vietnam's commercial centre of HCM City appears more comfortable. They reported a surplus in their funds after the pace of lending in the first four months of this year was slower than the build-up in deposits.
Banks raised an estimated 528.25 trillion dong (US$33 billion) in deposits, up 56.8% from a year earlier, and lent out 477.8 trillion dong, industry figures show.
In the currency market, the central bank cut the dong value slightly to 15,964 per dollar on Monday from 15,961 dong a week ago. But it was still firm from 16,114 dong at the end of 2007.
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