By the end of 2018, experts expect interest rates to rise. But in 2019, with the escalating trade war between the US and China, the world economic situation has quickly reversed. The Fed, has changed its direction to from raising to lowering interest rates.
By this time, the Fed has lowered interest rates several times and since the beginning of the year, over 30 central banks in the world have reduced their regulating rates. The current global trend is to loosen monetary policy and cut interest rates. Vietnam is following the international market trend, we have lowered interest rates to support businesses to increase production and business activities, promoting economic growth.
The policy of State Bank of Vietnam (SBV) is evaluated in accordance with the market’s trend, though the monetary policy executive has pursued many objectives simultaneously including being proactive, flexible and prudent; closely coordinating with fiscal and other macroeconomic policies to ensure macroeconomic stability, control inflation, support production and business, and promote economic growth.
In September 2019, SBV decided to reduce the rates by 0.25%, including refinancing interest rate, rediscount interest rate, overnight lending interest rate, and interest rate of buying valuable papers through open market operations (Decision No. 1870/ QD-NHNN takes effect from September 16). Especially from November 19, according to Decision No. 2415/ QD-NHNN, SBV has reduced the ceiling interest rate for deposits to less than six months. Lending interest rates for priority sectors were also reduced (Decision No. 2416/ QD-NHNN) by 0.5 percent per year. Thus, SBV has cut both input and output interest rates.
According to economic theory, usually, when the low cost of capital will stimulate businesses and investors to participate more in the market, it will promote more economic development. As for the exchange rate, usually the interest rate of a currency plummets, so does the price of that currency.
However, in Vietnam, the USD/ VND exchange rate has been quite stable over the past time due to many factors including the abundant supply of foreign currency in the economy thanks to the surplus trade balance, attracting more foreign investment. VND is considered as one of the most stable currencies in the region when the world market has been as volatile as last time. Therefore, experts commented that the decrease in interest rate impacted insignificantly on the exchange rate because of the macroeconomic characteristics, in which the Vietnamese market still supports increasing the supply of foreign currencies in the near future.
The purpose of SBV is to reduce the common interest rate level. SBV’s policy adjustments have had an immediate impact on market rates when many commercial banks decided to reduce mobilising and lending rates, even for subjects not subject to SBV’s regulations: to reduce interest rates for all terms over six months and reducing lending rates for customers outside the five priority areas.
Experts said that interest rates would continue to decline in 2020. The interest rate reduction will motivate businesses to borrow more investment capital, but it will not be long-term investments. Because the world market is having many complicated fluctuations, increasing market risk. And commercial banks themselves are in the process of cutting short-term capital ratio for medium and long-term loans.
Moreover, credit risk in medium and long term loans is always high. In addition, the commercial banks have boosted the technology application to increase the income from non-credit activities. Many commercial banks thrive in retail segment with individual customers, SME customers as the centre. Competition in the selling segment will be increasingly fierce as commercial banks must combine both trade and finance, financial and non-financial activities to attract customers.
Per capita income of Vietnam increased, a part of the people has high income. Decreasing interest rates will make them find more effective investment channels for savings. This is an opportunity and also a challenge for commercial banks in developing investment products for individual customers. Because the return on the assets held is an indispensable need for anyone, including professional and amateur investors.
If the bank is not quick and does not have more attractive investment products, it is likely that, in addition to the risky and even illegal investment channels, there will be “crazy” people who choose sports shoes to invest as a new trend that has just happened in the world recently.
