Rate to fight inflation down

Banks have a big role to play in helping to hose down overheating inflation

On February 23, the State Bank decided to lift seven-day lending rate to local banks via the open market operations (OMO) window from 11 to 12 per cent, per year.

It is the fourth raise since December 2010 from the long-lasting 7 per cent level.

Vo Thi Sanh, BIDV’s head of asset-liabilities committee, said that the lift would discourage banks from borrowing via OMOs.

“With current government bond yields at around 11 per cent, per year, borrowing from authority with rate of 12 per cent, per year is not profitable,” said Sanh.

Currently, with collateral being valuable paper such as government bond, the authority is lending to local banks at 12 per cent, per year.

As an immediate response from local lenders, on February 24 only VND825 billion ($40 million) worth of government bonds were sold out of VND6 trillion ($290 million) on offer. Winning yields were 11 per cent per year and 11.39 per cent, per year for three and five-year papers.

Last week’s auction was much less successful than 2011’s first batch. On February 11, VND4.65 trillion ($224 million) worth of two, three and five-year papers were sold against VND5 trillion ($241 million) on offer. In 2011, the National Assembly set government bond issuance target at VND45 trillion ($2.17 billion).

A Vietcombank executive said that the bond yield might be on the uptrend.

“With the shooting up of inflation, the bond yield will go up in tandem. That means banks can wait sometime to buy government bonds at higher returns. That is why last week, the government bond auction was not warmly welcomed as previously,” said the Vietcombank executive.

February’s consumer price index (CPI) reached 2.09 per cent month-on-month driving the year-on-year figure to 12.31 per cent, the highest level since February 2009.

Last week, the Ministry of Finance increased fuel price between 17 and 24 per cent. Financial experts said that this hike coupled with electricity price rise from March 1 would add to inflationary pressures.