Central bank to consider cutting basic interest rate
06-SEP-2008 Intellasia | 03/Sep/2008 Dau Tu Chung Khoan
Sep 6, 2008 - 7:00:00 AM
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Keeping the basic interest rate unchanged at 14% a year in September demonstrates the central bank's view on continuing pursuing the monetary tightening policy. Additionally, that the State Bank of Vietnam (SBV) raised the compulsory dong deposit reserve ratio applied for credit organisations from 1.2% a year to 3.6% a year is also considered a more active effect on activities of banks. Dau Tu Chung Khoan newspaper had a talk with Duong Thu Huong, general secretary of the Vietnam Bank Association, about impacts of such a decision. Excerpts:
Why does the central bank decide to keep the basic interest rate unchanged?
The basic interest rate is raised from 12% a year to 14% a year from 11 June. Recently, there is some positive macro-information such as reduction of petroleum price, slowdown of consumer price index and slight decrease in interest rates of many banks. Thus, some people forecasted reduction of the basic interest rate. However, as policy makers, we think that it's not high time to lower the basic interest rate because inflation has decreased in terms of growth ratio but inflation still reports year-on-year increase. Inflation is 21.65% by the end of August. It is forecasted that inflation will increase by some 25% year-on-year by the end of this year. In many recent meetings, we discussed whether the basic interest rate should be reduced. However, the difference between the basic interest rate and the ceiling lending deposit interest rate of 21% leaves enough room for commercial banks fix deposit and lending interest rates but commercial banks are not required to follow the basic interest rate.
Hiking the compulsory deposit reserve rate can help banks reduce at least how many percentage of lending interest rates?
Raising the compulsory deposit reserve ratio is aimed to help credit organisations to cut lending interest rates, which partially helps share capital burden with businesses and borrowers, promote business and production. However, how much banks can reduce lending interest rates depends strengths of different banks, structures, capital and others. Although the ceiling lending interest rate is 21%, that does not mean that banks apply that rate for their loans but that ceiling lending interest rate is considered as a technical barrier for loans. Many banks offer loans with far lower interest rates.
Some people said that SBV has not been able to cut the basic interest rate because reducing the basic interest rate will hurt commercial banks sharply but not inflation hurt commercial banks. What do you think about this?
I have no comment on this opinion. However when any policy is decided, the managing body must have a comprehensive look. Depositors want to be entitled to positive interest rates, businesses want banks to lower lending interest rates. What about banks? Banks are also businesses but they are special businesses. If banks are weak, whether will the economy be strong? Currently, difference between deposit and lending interest rates is some 0.15%. Expenses of banks amount up to 0.29%. Banks are facing up various difficulties. If the basic interest rate reduces, banks will suffer more pressures from deposits with high interest rates of previous months. We also should take such issue into account.
When will the central bank consider lowering the basic interest rate?
By this time, psychology of residents, businesses and the society is very stable. We should not make anything disorder. Regarding cutting the basic interest rate, we may consider this issue at least in the forth quarter. We must consider how inflation will be in September, how the economy will move in late months.
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