Short-term vision for monetary tightening

Techcombank was first to break ranks in muscling up its deposit rates

Despite local lenders shooting up mobilisation rates, the monetary tightening stance could be reversed in 2011’s first quarter.

State Bank governor Nguyen Van Giau said Vietnam was currently in a fight against ramping inflation and “thus, monetary policy has been tightened with short-term measures from three to six months”.

Two weeks ago, Techcombank fired the first gun-shot by lifting its maximum deposit rate to 17 per cent per year and Seabank followed by lifting its maximum deposit rate to a record 18 per cent, per year in 2010.

In response for this “interest rate race”, the State Bank requested the two banks immediately drop their rates and upon a meeting held by Vietnam Banking Association (VNBA), local lenders committed to deposit rates not going higher than 15 per cent, per year.

Some banking experts doubted that this commitment would be respected. Last week, Asia Commercial Bank set its 12-month deposit floating interest rate at 15.5 per cent, per year.

Nguyen Thi Kim Thanh, head of the Banking Development Institute, forecasted that the interest rate would be pulled down again in 2011.

“We now have to control inflation and high interest rates are needed. But, with interest rates this high, local enterprises cannot swallow [them]. Mobilising at 15-17 per cent per year, banks would have to extend loans at 18-20 per cent per year,” said Thanh.

Credit Suisse’s economist for India, Indonesia and Vietnam Robert Prior-Wandesforde said that notwithstanding the recent interest rate rise, which was likely to be backed up by a further 1 per cent move in 2011, the government’s preference generally remained for growth over inflation.

“As such, there is a sizeable risk that inflation will move even higher in the short-term, the trade position will deteriorate further and the dong will come under renewed downward pressure, in our view,” said Prior-Wandesforde.

Vietnam experienced double-digit consumer price index (CPI) year-on-year increase in November at 11.1 per cent, reflecting a combination of 20 per cent food price rises and 15 per cent price gains in housing and construction.

In response, early November, the State Bank lifted the base rate for the first time in 12 months from 8 to 9 per cent, giving a clear signal of monetary tightening. The discount rate and the refinancing rate were also hiked by 1 per cent to 8 and 9 per cent respectively.