Interest rates tipped to head further south this year

Inflation in 2012 was 6.81 per cent, lower than targeted one of 8 per cent, creating conditions for the State Bank of Vietnam (SBV) to reduce interest rates seven times during the year.

According to the National Financial Supervision Committee, if the targeted inflation in 2013 is 6 per cent, there would be room to reduce interest rates more.

“Vietnam’s deposit rates are higher than many other countries. For example, in the US the rate is 0.5-0.75 per cent, therefore, continuing to lower interest rates will still ensure the difference between deposit and lending rates, without causing pressure on the exchange rate in 2013,” the committee stated in a report released last week.

Moreover, the committee said given that other investment channels faced difficulties, there would be fewer opportunities for customers to withdraw money to invest elsewhere. The committee urged the SBV to continue controlling credit growth to keep inflation under the thumb.

According to the SBV, total means of payment in 2012 grew 20 per cent and total credit growth was 7 per cent.

BIDV Securities Company in a report released last week on the SBV’s recent move to reduce interest rates stated that it was “totally possible” for the lending interest rate to be down to 7-8 per cent by the end of 2013.

The current average lending rate commercial banks offer is 15-17 per cent, per year. “This is thanks to the positive developments in the non-performing loan (NPL) settlement and banking restructuring process, which limited system risks and should see inflation reach 7 per cent in 2013,” said the company’s research team.

Currently, many banks are downwardly adjusting their deposit rates for 12-month  terms and beyond by 0.5 per cent, after the SBV reduced all base and benchmark interest rates by 1 per cent at the end of 2012. Before the SBV’s reduction, commercial banks had reduced their long-term deposit rates by 0.5-1 per cent. Specifically, banking giant BIDV’s rate for a 12-month term deposit was 9.5 per cent, the lowest rate among banks. Meanwhile, a month ago, this rate was about 10-11.5 per cent. The highest rate for 12-month term deposit is 11 per cent, offered by a smaller-sized Sacombank.

However, it will take time to see how much lower interest rates can affect the total market capital supply or credit growth, as the main barriers including high NPLs and inventory have not been significantly handled.