Jury out on interest rates

How will interest rates perform in the last three months of 2011?

I think the interest rate will be further relaxed in the last quarter of the year. Reality shows that the State Bank’s recent intervention brought positive impacts.

The State Bank demanded banks to strictly follow the 14 per cent, per year ceiling deposit rate regulation and imposed penalties on violators which were applauded by the public.

In late September 2011, the State Bank made public Circular 30/2011/TT-NHNN requiring banks to apply [deposit] rates of up to 6 per cent, per year to less than one-month deposits to prevent small banks from rolling out ceiling rates of 14 per cent, per year to all deposit terms such as one day or one week to lure capital.

Apparently, the central bank’s intervention is crucial to cool down interest rates.

However, will lower deposit rates pull down negotiable lending rates in tandem? In fact many banks currently offer the dong lending rates at 17-19 per cent per year, but such preferred credit packages are just available to businesses operating in production, export and the agriculture and rural areas.

What other factors are relative to the interest rate situation?

Parallel to central bank intervention measures, interest rates depend on world economic events and domestic inflation. It is hard to predict how the world economy will impact on Vietnam. If the consumer price index (CPI) keeps going down as in the last two months, this will be a positive factor on interest rates.

September’s CPI just grew 0.82 per cent against the previous month. We expect the CPI growth will slow down in these last three months, paving the way for firms to become accessible to credit lines of more affordable rates to promote production and business during the peak year-end period.

Notwithstanding, to bring down interest rates in current context of market vulnerabilities is a complex task. The demand for capital from the business community is often soaring by the year’s end when deposit flows to banks are showing signs of declining. Besides, the CPI can hardly fall on the back of spiraling consumption in later months of the year.

Are current lending rates acceptable to production and export firms as well as businesses in agriculture and rural areas?

These 17-19 per cent, per year lending rates applicable to some above said sorts of firms will pressure borrowers. Besides, such lending rates are yet to be widely applied to businesses operating in other business areas.

Banks only give such concessionary loans to priority business groups after carefully considering their records to control bad debt rates. After all, lower lending rates were a goods news to firms which expect the rate would further go down in the coming period.