Hard for Vietnam to Cut Lending Interest Rate

Many central banks across the globe have followed FED and cut their interest rates. However, this trend is not expected to impact Vietnam’s monetary policy, meaning there will be no interest rate cut like in other countries.

State Bank of Vietnam.

State Bank of Vietnam.

Interest Rate Cut Across the Globe

On July 2, the Central Bank of Australia cut its interest rate by 0.25% to 1%. This was the sixth consecutive interest rate cut of this central bank to support the economic growth, reduce the unemployment rate and increase income of people.

Besides, the central bank of Chile also reduced its interest rate from 3% to 2.5%, and the central bank of Iceland decreased its interest rate by 0.25% to 3.25% for the second time in 2019.

At the meeting on July 25, the Central Bank of EU (ECB) decided to keep its interest rate unchanged at 0-0.25%, a historical lowest level, for refinancing, lending and depositing activities.

The Asia area is also inevitably out of the trend. On August 7, three central banks including central bank of India, Thailand and New Zealand announced to cut interest rate strongly. The central bank of New Zealand decreased interest rate by 0.5% to 1%, a historical low for this country. The magnitude of interest rate cut was higher than expectation. The central bank of India announced to cut its interest rate from 5.75% to 5.4% vs 5.5% as per expectation. The central bank of Thailand trimmed its interest rate by 0.25% to 1.5% to support the economy given its low inflation rate.

On August 8, central bank of Philippine also cut its interest rate by 0.25% to 4.25% to support economic growth given its low inflation, the negative impact of ongoing trade war between US and China, and the dependence of this country on export activities.

Interest Rate in Vietnam Expected to remain Unchanged

Answering the question of how will the interest rate cut in other big countries impact Vietnam policies, Dr. Tran Du Lich, member of the National Advisory Council on Financial and Monetary Policies said that Vietnam’s money policy will remain unchanged till the end of the year.

According to Dr. Tran Du Lich, in order to decrease the lending interest rate, Vietnam should implement multi-solutions simultaneously. Besides resolving problems of banks, the government should also increase corporate bond volumes to reduce the burden on the banking system. If Vietnamese enterprises continue depending on banks to raise capital for short-term, mid-term and long-term, the lending interest rate will be hard to cut down.
According to Viet Dragon Securities (VDSC), although the topic of interest rate cut across the globe is getting hotter, Vietnam interest rate is expected to be stable till the end of this year. The State Bank is expected to focus on improving the capability and liquidity of the banking system to reduce the lending cost of short term loans, rather than strongly cutting the long term interest rate given the available risk of asset price increasing.

The State Bank said that the interest rate cut of FED is an opportunity for Vietnam to stabilize the foreign exchange rate and decrease the interest rate. However, in the short term, the State Bank favors to keep interest rate stable. The State Bank will watch the money market, and liquidity status of banking system closely to pump money into the system to reduce the deposit raising pressure and lending interest rate.

Over the last two years, banks found it hard to cut the lending interest rates as they have been under pressure to meet the requirement of the State Bank on CAR (Capital Adequacy Ratio). The State Bank has prioritized to stabilize the interest rate and targeted to gradually cut down the lending interest rate. However, a report of National Financial Supervisory Commission found that the average interest rate has increased to 5.25% vs 5.11% of 2017 and the average lending interest rate has climbed to 8.91% from 8.86% in 2017. Note, that the interest rate cut is just one of many steps of the bigger monetary policies to support enterprise operations.

According to August report of the State Bank, the average lending interest rate of VND has been fluctuating around 6-9%/year for short term loans and 9-11% for long term loans. The lending interest rate of USD short term loans and long term loans were 2.8-4.7% and 4.5-6%, respectively.

If we compare to other countries, Vietnamese enterprises have to incurve much higher interest rate. The difference will be bigger when other central banks are cutting down their interest rates. However, this difference seems to be the nature of Vietnam’s banking system.

Do Linh

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