Loose monetary policy needed to reduce interest rates

After hitting a two-year high of 8.35% per year recently, the interest rate still shows no sign of cooling down, undermining the country’s efforts to help the economy recover over the past year.

Experts from HSBC and Vietcombank’s Securities Co have forecast that the lending interest rate will increase by some 50 basis points this year.

Le Xuan Nghia, director of the Business Development Institute, was concerned, saying if the interest rate increases again, all the country’s efforts to restore the economy could fail.

Former central bank governor Le Duc Thuy also said hikes in interest rates may limit businesses in Vietnam from expanding this year. Interest rates went up at the end of 2015, and this trend is continuing into 2016 as banks face liquidity troubles.

Rates continue to climb, possibly by 1%-2% this year compared with the average in 2015. Thus, it is obvious that enterprises cannot expand operations normally as they did last year, Thuy said.

Thuy estimated that increases in deposit rates could raise the average long-term lending rate to 11% per year, while a number of loans could bear higher rates as well.

Commercial banks have so far attributed the interest rate hike to anticipated increases in inflation, higher capital demands and the review of Circular 36, which may reduce the percentage of short-term capital used for medium- and long-term lending to 40% from the current 60%.

However, experts identified G-bonds as the main cause of the interest rate hike.

According to Nghĩa, the market’s interest rate curve depends on the interest rate of G-bonds.

Other interest rates cannot go down when the interest on G-bonds goes up, Nghia said, adding that commercial banks have poured more money into G-bonds, which have a high interest rate and zero risk. Currently, banks hold some 80% of the total outstanding G-bonds.

Bui Quoc Dung, director of the Monetary Policy Department under the State Bank of Vietnam, also named G-bonds as one of the major factors that exert pressure on interest rates.

According to Dung, the yields of five-year G-bonds last year soared to nearly 7% per year from 5.5% earlier, coupled with a higher issuance volume this year. This will weigh heavily on medium- and long-term interest rates.

To reduce interest rates, Nghia suggested the central bank should loosen its monetary policy by reducing the compulsory reserve ratio and restricting the issue of bills to withdraw money.

The central bank should also actively take part in the inter-bank market to stabilise the market’s interest rate, Nghia said.

Besides, Nghia said, the government should adopt strict measures to reduce the budget deficit, which will help reduce mobilisation through G-bonds.

However, if the monetary policy is further loosened, money must be controlled to flow into the right industries to help the economy further recover, while successfully controlling inflation, Nghia said.

Experts also expected the Circular 36 draft to reduce pressure on capital and interest rates for domestic commercial banks as the regulation could allow joint venture and wholly foreign-owned banks in Vietnam to use up to 35% of their short-term funding to buy G-bonds, a considerable rise from the current 15%.