Interest rates to slowly head south

08:06 | 12/03/2012
High interest rates are set to fall in tandem with inflation.

State Bank Governor Nguyen Van Binh last week talked down criticism that interest rates were too tough for enterprises by saying since March 10, commercial banks’ ceiling deposit interest rate would be reduced to 13 per cent, from the current 14 per cent.

Also, Binh told a press conference last Wednesday that the State Bank of Vietnam (SBV) would reduce the discount and refinancing rates by 1 percentage point in the “next few days” to 12 and 14 per cent, respectively.

He said Vietnam now had appropriate macroeconomic conditions to reduce interest rates.

“Lending rates have been on a downward trend since the fourth quarter of 2011, currently hovering at 17-19 per cent, per year and banks’ liquidity problem has been partly solved.”

While businesses will welcome interest rate cuts, economists fear that the government will ease monetary policy too soon, renewing inflationary pressures. Moreover, the 10 per cent hike in petrol price announced last week threatens to fuel inflationary risks.

According to ANZ’s Emerging Asia monthly report issued on March 1, as monthly inflation picked up in February and inflation momentum risks rose again, it was expected SBV would keep key policy rates unchanged in March to ensure inflation expectations were anchored.

“If inflation is in single-digits and monthly inflation eases in March, then a gradual monetary easing cycle can commence to support growth,” said ANZ analyst Hai Pham. The consumer price index (CPI) in February increased by 1.37 per cent on-month. Meanwhile, February and January’s CPI increased by 2.38 and 1 per cent, respectively against the end of last year.

Banking expert Nguyen Tri Hieu said that SBV should wait until the end of the first quarter to reduce interest rates. If March’s CPI was in a downward it meant Vietnam had sustainably controlled inflation, he said.

“Reducing the deposit rate is a positive signal for reducing lending rates further and relieves enterprises’ capital cost burdens. Nevertheless, easing monetary policies now would be hasty,” said Hieu.

Viet Capital Securities head of research Marc Djandji said the government had done a great job in anchoring inflation expectations and a gradual rate reduction was reasonable. “However, the question will be what happens to negotiated deposit rates that are above the cap,” said Djandji.

Last September the State Bank reduced the mobilisation cap to 14 per cent to create favourable conditions for banks to reduce rates. However, in reality the lending rate still proved too tough on enterprises and cap violations occurred.

Executives of some companies contacted by VIR claimed such interest rate cuts would do little to counteract the effect of high lending rates on them. They said  the central bank had not gone far enough.

Dang Quoc Hung, vice chairman of Ho Chi Minh City’s 340-corporate member Handicraft and Wood Industry Association, said  the rate cut was too small and it would have very little impact on bank lending rates. “This means that our association’s member companies will still have to borrow with lending rates of 18–20 per cent. The suitable lending rate should be reduced to 10–12 per cent so that companies can ensure their normal operations,” Hung said.

At present, high lending rates and capital shortages are leaving a hole in company pockets. “The majority of companies have either temporarily stopped production or are suffering from a shortage of orders from overseas. Just now, production costs are even higher than selling prices,” he added.

Pham Chi Cuong, chairman of the Vietnam Steel Association, said the association’s 116 member companies were paying 18–22 per cent in loan interest, per year. “The 1 per cent cut is negligible. However, it is a good signal in the government’s policy monitoring.

“The lending rate should be 10 per cent. Many steel firms are either bogged down in debts or have called a halt to production due to high lending rates,” Cuong said. Nguyen Huu Su, general secretary of the Hanoi Small and Medium Enterprise Association, said the SBV move was a positive signal. “But the prices of many goods like petrol, coal and foodstuff have kept rising,” he said.

By Tung Trang

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