The State Bank of Vietnam (SBV) recently decided to reduce the 0.25 percent refinancing interest rate; rediscount interest rate; overnight lending interest rate in inter-bank electronic payment and lending to compensate for capital shortage in clearing with banks; offering interest rates of valuable papers through the open market operation.
That was the first time since October 2017, SBV reduced the operating interest rate when many central banks worldwide lowered interest rates many times since the beginning of the year to support the economy.
About the reasons for reducing interest rates, the SBV representative explained that previously, in the context of increasing international interest rates, SBV coordinated monetary policy solutions to stabilise interest rate, contributing to macroeconomic stability and supporting balanced economic growth.
In the current background, SBV reduced interest rates to continue supporting the economy and liquidity for credit institutions. Also, adjusting the reduction of operating rates would help credit institutions have access to capital from SBV with lower costs, to support stabilising interest rates of credit institutions, as reported by SBV representative.
Le Xuan Nghia, former vice Chair of the National Financial Supervisory Commission, commented that the decrease by 0.25 percent of operating rate did not affect the market immediately but created a space for SBV to adjust policies easily as well as positive psychology to the market. From then until the end of the year, SBV might consider reducing the operating rates, then truly support economic growth.
Sharing the same view, Nguyen Duc Hung Linh, Analysis and Investment Advisory director of SSI Securities Corporation, acknowledged that in the short term, interest rates on interbank transactions and government bond yields with short term on the secondary would be most affected by the interest rate adjustment in the open market.
The evidence was that when the information on reducing interest rates appeared, overnight interest rates on the interbank dropped sharply to 2.78 percent per year by 20 percentage points; one-to-three-year government bond yield declined six to 12 percentage points to around 2.6 percent per year.
Under ideal conditions, cheaper capital costs in the interbank market and the liquidity were expected to provide a basis for commercial banks to adjust the interest rate level in the market one, which meant the mobilisation rates of banks from residents and economic organisations. However, the impact would take a long time.
One gain, one lose
Joint Stock Commercial Bank for Investment and Development of Vietnam (BIDV) Securities Company (BSC) assessed reducing interest rates of SBV lowered VND/CNY exchange rate, avoiding negative impacts on exports and competitiveness with an important trading partner, China. The market received this circular quite positively as this was one of the first signs of economic easing policy.
However, Nguyen Tri Hieu, finance and banking expert, analysed that the reduction of operating interest rates was quite low compared to the current lending interest rate level. Therefore, the impact cutting interest rates on the management of deposit rates and lending rates would be limited. Also, if it did work, at least one to three months of delay would be needed.
However, according to Hieu, when the interest rate decreased, the value of dong also fell pushing the exchange rate to rise. Therefore, the reduction of the operating interest rate might affect the exchange rate. That was beneficial for export but adverse for importing enterprises and increased the value of public debt in dong. Most likely from then to the end of the year, the exchange rate would increase by about two percent.
On the other hand, the deputy general manager of commercial banks assessed that theoretically reducing the operating interest rate would reduce costs for banks, but the question how it affected capital mobilisation was such a distance. Because, when borrowing from each other, banks had to follow the market mechanism.
Sometimes, there was a lack of liquidity, a lack of compulsory reserves compared to the regulations of SBV. Banks forced to borrow overnight on the market two with interest rates up to 15 percent to 18 percent per year while interest rate on the market one was only 11 percent to 13 percent per year. It showed that reducing interest rates in the market two can hardly pull down the mobilising and lending interest rates in the market, the deputy general director of the bank emphasized.
Therefore, when asked about the forecast of interest rate movements from now until the end of the year, some experts said that with the current positive domestic macro-economic background, interest rates would basically change stable and become difficult to reduce.
