In the report on the State Bank of Vietnam (SBV)’s interest rate cut action, KB Securities Company (KBSV) said that the reduction of the reverse repo rate from four percent to 3.5 percent per annum and other policy interest rates such as refinancing and rediscount rates does not have much impact at the present time.
KBSV provided two reasons. Firstly, refinancing and rediscounting are not frequently used operations, they only take place when some banks have major liquidity difficulties and must borrow from the SBV when cannot borrow via the interbank channel. Secondly, the liquidity of the system is currently abundant, the reverse repo channel on the Open Market Operation (OMO) has not been used in the last three months.
Regarding the lowering of deposit rate cap for terms of less than six months, according to KBSV, in general, there is direct impact on commercial banks. However, the impact is not much, because the deposit interest rates for term six months or more are still adjusted according to the supply and demand of the market, particularly when the reduction of deposit rate cap this time was only 25 basis points.
A notable point is that the SBV has raised interest rates for compulsory reserve deposits in dong to one percent per annum, in order to support banks when their income is supported while launching preferential credit packages (worth 285 trillion dong) for businesses hit by the Covod-19 epidemic. According to financial statements of banks, by the end of 2019, the total value of deposits at the SBV of commercial banks was about 330 trillion dong. Thus, the support from the SBV is nearly 660 billion dong.
Overall, KBSV assessed that the lending interest level is likely to decrease in the near future (expected at 0.5 percentage point) for two main bases. Firstly, the credit demand of businesses has fallen sharply due to the Covid-19, reflected by the credit growth of only 0.06 percent in the first two months of 2020, the lowest level in six years), while the system liquidity remains abundant. Secondly, the cost of raising capital on the interbank market dropped, along with the policies to support businesses of the government.
As the inflation is still high, the room for the SBV to continue lowering interest rates in the near future is not large. Instead, KBSV expects that the government will promote fiscal stimulus policies, including tax payment extension and refund, interest rates, insurance, etc. which have a direct impact on supporting the liquidity of businesses that are facing difficulties without affecting inflation.
