Inflation still a thorn in the side of banks

Accelerating inflation this month will prove a fly in the ointment for local lenders trying to bring down market interest rates.

The consumer price index (CPI) in Vietnam accelerated more than expected in October, fast approaching familiar double-digit territory. The index surge in October hit 9.7 per cent year-on-year compared to 8.9 per cent recorded in September.

On a monthly basis, the CPI in October rose 1.5 per cent against September.

Sherman Chan, HSBC’s regional economist for ASEAN, said the jump in inflation would have shaken investor confidence.

Vo Thi Sanh, vice head of BIDV’s Treasury Department, said efforts to pull down market interest rates could have side-effects and make inflation the most alarming macro indicator.

In September, the government continued calling local lenders to further cut mobilising rates toward 10 per cent, per year level and lending rates to 12 per cent, per year.

In early October, the Vietnam Banking Association (VNBA) called on banks to continuously lower their mobilising rates to 11 per cent from October 15 en route to a desired 10 per cent, per year target.

Chan said the government had focused primarily on boosting economic growth in recent times at the expense of higher inflation. 

“For instance, the government’s continued push for lower interest rates is perhaps fanning inflation, especially if cheap credit is allocated to inefficient use. Although policy-makers have also tried to address the inflation issue, the use of price controls does not seem to be a sustainable solution,” said Chan.

Food price inflation accelerated from 10.8 per cent year-on-year in September to 11.9 per cent year-on-year in October.  Sanh said that higher inflation also made lowering deposit rates more impossible. “That is why local banks are offering promotion programmes to lift actual deposit rates,” added Sanh.

After October 15, all local lenders en masse lowered deposit rates to within 11 per cent, per year. However, they are offering promotions such as gifts.

Chan said foreign investment was important to Vietnam and policy-makers should understand that investors were not only watching the country’s growth prospects, but also its macroeconomic management.

“Policy tightening at the current juncture would do more good than harm to the economy. Real interest rates are now deeper in negative territory. As much as the authorities would like to maintain an accommodative monetary policy, tightening seems to be the more appropriate direction now.

For a start, stopping the push for credit growth may ease inflation and non-performing loan concerns, thereby giving a much needed shot of confidence to investors,” Chan said.