Further interest rate cut seems to be challenging

21-Jul-2020 Intellasia | Thoi bao Ngan hang | 6:02 AM Print This Post

Tran Du Lich, a member of the National Financial and Monetary Policy Advisory Council, said that deepening interest rates then would be difficult due to its limit. The State Bank of Vietnam (SBV) could only do it in all its capabilities but could not willfully reduce interest rates.

At the recent meeting of the National Monetary and Financial Policy Advisory Council, prime minister Nguyen Xuan Phuc said that, unlike most countries, the national fiscal and monetary policy was quite large for stimulating aggregate demand and growth. Therefore, besides the solutions on the fiscal policy, such as continuing to consider reduction, postponement, exemption and reduction of taxes, fees, charges, the prime minister asked the banking industry to continue to consider lowering interest rates to share difficulties with businesses and people.

Talking to reporters, Vo Tri Thanh, a member of the National Financial and Monetary Policy Advisory Council, said that whenever any country fell into difficulties or economic recession, monetary policy always appeared to be the first factor to be taken into account. In Vietnam, in an unusual context, especially when fiscal policy was limited, support from monetary policy became essential. From the beginning of the year until then, SBV had lowered the interest rate twice. If the inflation were well controlled, in the near future, the monetary policy management could still be loosened more or less by measures like lowering the interest rate, increasing the money supply.

Under normal conditions, no country wanted central banks to inject money to support growth. However, in exceptional cases, it was still necessary to use. However, it was of great importance to balance the dose to limit side effects later, Thanh further noted.

Another member of the National Financial and Monetary Policy Advisory Council, Bui Duc Thu, also assessed that SBV had actively operated monetary policy to reduce interest rates and put many large credit packages. However, despite the much lower interest rate level, while the capital absorption of the economy was weak, the loan balance in the first six months of 2020 increased by only half compared to the same period in 2019. Therefore, to boost capital demand, in the view of Thu, banks could consider reducing interest rates further to help businesses access cheaper capital, thereby reducing costs to recover in this problematic situation.

However, talking to the Bank Times reporter, Tran Du Lich, a member of the National Financial and Monetary Policy Advisory Council, said that more reducing interest rates would be difficult due to its limit. The State Bank of Vietnam (SBV) could only do it in all its capabilities but could not willfully reduce interest rates.

In theory, to raise the cap to lower lending rates, banks had to lower deposit rates. In fact, since the end of June, banks continuously lowered deposit rates in many terms. Most recently, Vietnam Technological and Commercial Joint-Stock Bank (Techcombank) had reduced interest rates for savings at the counter with the one-month term from 3.5 percent 4 percent to 3.15 percent 3.65 percent per year. If customers received interest in advance, they would be paid an interest rate of three percent per year. Joint Stock Commercial Bank for Foreign Trade of Vietnam (Vietcombank) had also lowered deposit rates for 36-month terms to 5.8 percent per year, down by 0.2 percent per year. Previously, Vietcombank, Vietnam Bank for Agriculture and Rural Development (Agribank), Joint Stock Commercial Bank for Investment and Development of Vietnam (BIDV), Vietnam Joint Stock Commercial Bank for Industry and Trade (Vietinbank) simultaneously lowered deposit interest rates for many terms, of which short terms from one to two months fell to only 3.7 percent per year. Some other commercial banks, such as Vietnam Prosperity Joint-Stock Commercial Bank (VPBank), HCM City Development Joint Stock Commercial Bank (HDBank), Tien Phong Commercial Joint Stock Bank (TPBank), Vietnam International Commercial Joint Stock Bank (VIB), also reduced input interest rates.

According to experts, the interest rate was currently the lowest in 10 years. Therefore, it was necessary to be cautious and adjust the deposit interest rates in the near future. Falling interest rates narrowed the gap between interest rates and inflation, which meant that the monetary policy space was also narrowing. Supporting the policy of reducing lending rates, but Bui Duc Thu said that it was necessary to be extremely considerate when continuing to reduce deposit rates. Because in the first six months of the year, the average consumer price index (CPI) had increased by 4.19%, while interest rates for short terms at many banks were below four percent per year. Therefore, interest rate reduction must be based on market signals. Policies must be synchronised to ensure the harmonisation of benefits in the economy, not only businesses or banks but also for the depositors and other components of the economy. Sacrificing the interests of this object to handle other problems was not sustainable, Thu added.

According to Nguyen Tri Hieu, a financial expert, continuing to reduce interest rates must lower inflation. If trying to reduce interest rates as low as inflation or even below inflation, money would flow into asset channels. This phenomenon had already begun to happen. If asset price bubbles occurred, they would cause risks to the economy and make the recovery process more difficult.

Viet Dragon Securities Corporation (VDSC) also found that the continuous reduction of commercial interest rates, on the one hand, helped banks reduce capital costs, but would also stimulate cash flow to shift to investment channels such as securities and real estate, which were the two most popular investment channels in Vietnam.

In fact, interest rates were not bottlenecks, but the ability to absorb credit of the economy was fragile. Therefore, even if banks reduced interest rates, it would still be challenging to stimulate credit growth. According to Do, deposit rates, interest rates on the interbank market had reached a record low, so they were hardly be reduced further. When interest rates were no longer a bottleneck in credit relations, even further reduction would not affect much.

Therefore, members of the National Financial and Monetary Policy Advisory Council said that it was necessary to consider the use of monetary policy to support the economy in the context of inflation in an upward direction. If the gross domestic product (GDP) and inflation increased, then boosted bad debt, all achievements of the government, as well as SBV, to control inflation, stabilise macro-economy, raise the value of the dong, would be destroyed. To stimulate aggregate demand and create momentum for growth, in addition to actively managing monetary and fiscal policies, these experts recommended how to stimulate domestic demand and accelerate disbursement speed.

 

Category: Finance, Vietnam

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