On June 10, the State Bank raised the prime interest rate by a whopping 2 percentage points, from 12 to 14 percent per year. The refinancing rate was set at 15 percent per year, up by 2 percentage points and the discount rate at 13 percent per year, up 2 points.

These new rates are effective as of June 11, marking the third time the central bank has raised the benchmark in the past six months.

The latest hike was on May 19 when the prime lending rate was also raised to 12 percent from the previous 8.75 percent.

The prime rate set by the central bank is used by commercial banks to set their own interest rates for deposits and loans.

Pursuant to the nation’s Civil Code, lending rates cannot exceed 1.5 times the prime rate. That means that banks are now required to have lending interest rates of no more than 21 percent per year, rather than the 18 percent over the past three weeks.

Commercial banks have not yet overcome liquidity shortages given the very low growth rate of deposits. They have raised deposit rates to over 16 percent per year. Some have gone as high as 16.56 percent for three month deposits.

These rate hover near the leading cap of 18 percent, which leaves a very thin profit margin for banks.

While previously implementing the 18 percent lending cap, most banks began charging clients seeking loans with additional fees, pushing real lending interest rates to around 21-22 percent per year.

In response to the new lending rate increase on June 10, the central banks Governor Nguyen Van Giau, in Official Document No 5158/NHNN-CSTT, prohibited banks from charging extra fees.

The Central bank offices throughout the country will monitor commercial banks to make sure they comply with the new requirement and offenders will be punished.

An economist from the Central Institute for Economic Management (CIEM) said that the increase in the prime rate was to protect the VND at the present. But, in fact, several commercial banks based in Hanoi were still hesitant to raise rates. They were “waiting and seeing” how the market moved.

On June 10, the central bank also set the inter-bank exchange rate at VND16,461 per US dollar, effective on June 11, a dramatic 2 percent (one-day) depreciation of the domestic currency against the dollar. The inter-bank rate was set at VND16,139 on June 10 compared to VND16,112 on January 2 this year.

The SBV confirmed that the daily trading band still remained at (+/-1) minus on plus 1 percent over the inter-bank rate set by the central bank, which means commercial banks can list buying/selling rates at 16,296/16,626 VND per US dollar.

The US dollar reached VND16,300 as the listed selling price of Vietcombank on June 10, was up 2.72 percent against early this year.

On the open market, the US dollar hit VND17,800 late on June 10.