Since August 2011, policy to reduce the lending interest rate has been set out by the State Bank of Vietnam (SBV). Since early this year so far the central bank has made five adjustments on key rates and deposit interest rate cap. The lending interest rate has been also lowered considerably from early this year together with the policy to reduce the lending interest rate for old loans to maximum 15 percent per year.
With proposal to further lower the interest rates against the current 15 percent per year, even at 8-10 percent per year for short term loans, Nghia said that interest rates do not fluctuate as desired completely but it is an important macro price type and has market objectiveness.
According to Nghia, from the middle of 2011 so far, the interest rate difference between dong and foreign currency has been very big, prompting people, businesses and banks switch assets from foreign currencies to the local greenback to enjoy higher interest rate. However, that gap has now been narrowed.
With an assumption that the average deposit interest rate in US dollar is 4 percent per annum minus the US’s inflation at 2%/year plus Vietnam’s inflation at 5%/year and forex rate risks by 2 percent p.a., While the average deposit interest rate in dong at 11%, the actual difference between the interest rates in dong and US dollar is 2 percent per year.
Nghia analyzed this is the only room left for the central bank to reduce the interest rate. However, this room is very fragile because in Vietnam’s inflation index, food and foodstuff items account for up to 40 percent while the prices of these commodities usually increase seasonally, especially by the end of the year. This is beyond the control of the central bank. Therefore, the central bank in fact has only 1 percent room left to reduce the interest rate from now till the end of this year.
If the interest rates are further lowered, people, business and banks will switch again from holding assets in local greenback to keeping foreign currency and therefore the forex rate will fluctuate strongly and may cause serious macro-economic instabilities.
In addition, bad debts are also a factor preventing commercial banks from further lowering the lending interest rate despite the saving rate has fallen sharply because they have to spare for credit risk provision fund and increase the costs of bad debt settlement.
On the issue of lowering the interest rate, Nguyen Dai Lai, independent financial specialist, said low or high interest rates after all depend on the capital absorption capacity of borrowers. And this capacity depends on inflation, deposit interest rate and operation costs of banks. In fact, inflation momentum is declining and capital absorption capacity of the economy is weak, which are the objective factors forcing the interest rate to fall.