Lending rates under pressure in Vietnam amid market developments

  VIETNAM’S CENTRAL BANK has targeted keeping interest rate stable in 2017 but the market’s developments in the first half of January show that lending rates are suffering from many pressures, the Nguoi Lao Dong (Labourers) newspaper has reported.
Analysts said the goal to stabilise interest rates this year may face many challenges, such as the recovery trend of commodity prices in the world market, including petroleum; the price adjustment of essential commodities of electricity, health services and education; and the risks of climate change and natural disaster.
Besides this, it is forecast the exchange rate will also put pressure on interest rates in 2017.
It is forecast the US dollar will continue strengthening due to the expectation that the US Fed will continue increasing interest rates this year and in 2018 and 2019. This trend would make it difficult for local commercial banks to reduce interest rates because at that time, the exchange rate between the US dollar and other currencies, including the dong, would increase.
If Vietnam lowers interest rates, it would make the US dollar/dong exchange rate increase, resulting in imported goods becoming expensive and making it difficult for businesses, it is forecast.
In addition, the central bank’s regulation to reduce the ratio of using short-term capital for medium and long-term loans from 60 per cent to 50 per cent from January 1 will affect deposit rates, especially terms that are more than 12 months.
Prime Minister Nguyen Xuan Phuc admitted the interest rate issue was a serious problem for the central bank in 2017, especially in the context that inflation must be curbed and the macro economy must be stabilised. The country this year is targeting gross domestic profit growth of 6.7 per cent and inflation of 4 per cent.
In a bid to stabilise interest rate sand control inflation, it has been suggested the central bank adjust inter-bank rates reasonably through the open market operation (OMO). Commercial banks could orrow capital from the OMO market to stabilise liquidity and deposit interest rates.
Besides preparation to cope with the US’s Fed policy on increasing interest rates, measures to support commercial banks enhancing medium- and long-term capital sources must be also taken.
It has also been recommended that the government continuously regulate prices of petroleum, electricity and public services according to the market mechanism with the State’s management. Any changes in the prices of such commodities and services must be considered carefully and taken at a suitable time to avoid strong negative impact on the price level.