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On the interbank market, the overnight borrowing rate dropped sharply to 13 per cent, per year, 9 per cent per year lower than average in April. The one-week rates also declined significantly to 14 per cent, per year from 21.5 per cent, per year in April. The interbank market is where local lenders borrow each other short-term funds and significant rate downward trend normally signals an improved liquidity in tandem.
According to economic analysts at Viet Capital Securities Company (VCSC), the State Bank may increase dong reserve requirements in the near future, but first it must convince smaller banks that they will not face liquidity issues following the move.
“Given the high inflation and widened trade deficit, we believe the State Bank may increase the dong reserve requirement ratio to withdraw dong from the system in the near future,” said VCSC analysts.
In March, the State Bank governor Nguyen Van Giau said the authority had not lifted dong reserve requirements due to concerns that small-scale banks might suffer funding shortages.
The reserve requirement, for instance at 3 per cent currently, is a ratio which regulates lenders to give 3VND to the State Bank for each VND100 mobilised. Different from other economies, Vietnamese banks have to bear one uniform ratio regardless their size and risk management capability.
In May, the consumer price index (CPI) grew by 2.21 per cent month-on-month, pushing the year-on-year figure to 19.7 per cent, the highest level since 2009.
A Vietcombank executive said the State Bank was likely to lift Vietnam dong reserve requirement to further tighten its monetary policy against ramping inflation.
“In fact, this is one of the quickest ways to withdraw money from circulation in the context of high inflation,” said the executive.
Recently, the authority has pumped out large amounts of dong by buying foreign currencies from local banks.
Santitarn Sathirathai, Credit Suisse’s economist covering Thailand and Vietnam, said the monetary tightening moves could include hiking the open market operation rate, which would send a strong signal that the government was willing to step up its fight against inflation at the expense of growth.
Two weeks ago, the State Bank decided to lift lending rate to local banks via open market operations (OMO) window from 14 to 15 per cent, per year. It was the sixth rise since last December from 7 per cent per year.
Three weeks ago, a similar move was also deployed to lift the OMO rate from 13 to 14 per cent, per year.
Via OMOs, banks borrow money from the State Bank with collateral being valuable paper such as government bonds.
Inflation in Vietnam continued to accelerate in May approaching the 20 per cent level seen in 2008.
The consumer price index (CPI) accelerated to 19.78 per cent year-on-year in May from 17.5 per cent in April, forming a nine-month streak of rises. On a month-on-month basis, the CPI climbed by 2.1 per cent in May, after rising by 3 per cent the previous month.
Sathirathai said that despite the OMO rate now set higher than the 14 per cent, per year dong deposit rate cap, a further hike could be on the cards.
“We still expect another 1 per cent hike in the OMO rate to bring the policy rate to 16 per cent per year by the end of 2011,” said Sathirathai.
It has been more than three months since Vietnamese authorities shifted their policy focus from boosting growth to curbing inflation. However, prices have picked up across the board in Vietnam, most notably in food and energy-related items.
Financial experts said that the March and April readings were boosted by the double-digit hikes in electricity and fuel prices in late-February and again late-March.
Meanwhile, food inflation quickened for the 12 strait months in a row, hitting 28.3 per cent year-on-year in May compared with 24.4 per cent in the previous month.
So far, the State Bank has deployed all measures except hiking reserve requirement for Vietnam dong deposits.
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