State Bank to stay the course despite base interest rumours

Local banks expect a base rate cut to lower mobilising rates

According to a State Bank’s Monetary Policy Department source, the authority had no plans to reduce the base interest rate in September and a rate change would be considered only from October, 2008. From June 11, the base interest rate has been set at 14 per cent. “If the State Bank reduces the rate from September, it could negatively affect the fight against inflation,” said the official.

The official added that the consumer price index (CPI) in August, 2008 could increase by less than 2 per cent. “This is expected to be a good result compared to experts’ forecasts of around 3 per cent CPI increases in August following the petroleum price hike in July,” said the official. In July, 2008, the CPI rose just 1.13 per cent month-on-month, the smallest monthly leap since the beginning of 2008.

“However, the State Bank could make adjustments after collecting all the macro-economic data of the third quarter. Any monetary relaxation would be taken into thorough consideration,” said the official. According to Huynh Quang Tuan, Asia Commercial Bank’s (ACB) deputy general director, local commercial banks are now all expecting a base rate cut as a suitable reason for lenders to lower rates.

“The State Bank rate cut would make it easier for local banks to reduce mobilisation rates while still being able to retain depositors,” said Tuan. Tuan added that, with current rate of 17.78-18.04 per cent per year while lending rates are around 20-20.5 per cent per year, local banks are running credit services at losses.

The State Bank’s official estimated that credit growth this month would be very low at less than 1 per cent. “With the base rate cut, local banks could reduce the mobilising interest rate to 15-16 per cent per year which would enable them to extend more loans to the economy,” said Tuan.

However, financial experts said that the State Bank should be cautious with the cut. “Base rate cuts show a relaxation in monetary management. Inflation fighting oriented policies are what foreign investors are looking at. Any relaxation could make inflation pressure lag further into 2009,” said a financial expert.