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Central bank cuts key rate to damp impact of global crisis   2008-10-21 - TN, Agencies

 
 
Commercial banks have eased dong deposit rates after their liquidity improved and the credit market stabilized, Habubank General Director Bui Thi Mai said. (NGHIA PHAM)  
The State Bank of Vietnam Monday cut the benchmark interest rate to 13 percent to limit the “negative impact” of a possible global recession on the economy.

The central bank reduced the key rate from 14 percent, effective from today, according to a statement on the State Bank of Vietnam (SBV)’s website. Vietnam’s benchmark rates, which had been raised thrice since February, are still the highest in Asia, along with Pakistan’s, as the government tries to slow inflation from 27.9 percent.

Commercial banks use the base rate to calculate their own rates for lending and deposits. It had been at 14 percent since June.

“If they are doing this now, they must feel very comfortable that inflation is under control,” said Alain Cany, the Ho Chi Minh City-based chairman of the European Chamber of Commerce (EuroCham) in Vietnam. “With inflation looking to be more under control, and given the world situation, I don’t think this damages the central bank’s credibility.”

Lower interest rates will make it easier for companies to borrow money, bolstering company profits and helping the government to meet its growth target. India Monday cut its key rate for the first time since 2004 to protect Asia’s third-largest economy from the global financial crisis.

Nguyen Dai Lai, Deputy Director of the SBV’s Banking Development Strategy Department, told Thanh Nien Daily the central bank had cut the official interest rate in a bid to “increase the liquidity of commercial banks and help them reduce their lending interest rates in order to create more favorable conditions for firms to access capital.”

Vietnamese policy makers also lowered the refinancing rate to 14 percent from 15 percent, and the discount rate to 12 percent from 13 percent, according to the statement. The central bank doubled the interest rate it pays on compulsory reserves for banks to 10 percent.

Global crisis

“Although the Vietnamese economy isn’t yet showing signs of a recession, we have seen some impact of the deepening global financial crisis,” said Nguyen Thi Kim Thanh, a deputy director of the bank’s Monetary Policy Department in Hanoi. “It’s now time for the central bank to do something to prevent the economy from slowing further.”

The central bank will also buy back VND20.3 trillion (US$1.2 billion) of compulsory bills, starting from today, depending on banks’ individual need for capital. The bank sold the bills in March to reduce liquidity and constrain inflation.

Policy makers have been under pressure from companies to reduce borrowing costs, after three rate increases this year.

Prime Minister Nguyen Tan Dung said last week that Vietnam may miss its target of 7 percent economic growth for 2008 as companies are finding it difficult to raise money. Gross domestic product expanded 8.5 percent last year.

The central bank said it changed the rates “to implement the government’s guidance on containing inflation, proactively limiting the negative impact of the global financial crisis and recession as well as to ensure a stable macro economy.”

The rate adjustments were also to help “maintain reasonable and sustainable growth,” the central bank’s statement said.

The central bank has said there is room for credit expansion as bank loans at the end of September rose only 18 percent from the same period in 2007. It aims to keep the country’s annual lending growth at 30 percent.

Slowing inflation

Inflation slowed last month from 28.3 percent in August. Along with lower-than-expected credit growth recently, the central bank has some scope to consider lowering rates, Le Xuan Nghia, director of the central bank’s Banking Development Strategy Department, said in a telephone interview on October 17.

The central bank may release inflation figures for October as early as this week.

Vietnam on Saturday lowered gasoline prices for a third time this month after crude oil declined, reducing pressure on inflation.

The government cut the price of 92-RON gasoline, the most commonly used grade, by 3.1 percent to VND15,500 a liter from VND16,000.

The dong had the biggest drop in more than a month on speculation the rate reductions will increase liquidity in the banking system.

The currency declined 0.33 percent to VND16,660 versus the dollar as of 4:30 p.m. Monday in Hanoi, according to data compiled by Bloomberg. The dong last fell more on September 19, when it weakened 0.45 percent.

The “positive move” was a “signal that the lending rate will be cut further,” Le Dac Son, Hanoi-based chief executive officer of Vietnam Joint-Stock Commercial Bank for Private Enterprises.

Vietnamese banks have yet to announce any rate cuts following the central bank’s move, which emerged after the country’s tiny stock market ended down 3 percent Monday.

They have recently slashed annual interest rates on 12-month dong deposit to below 16 percent currently from the peak of 19.2 percent in June

Commercial banks eased dong deposit rates after their liquidity improved and the credit market stabilized, Habubank General Director Bui Thi Mai said.

Lending rates on Vietnam’s interbank markets have also eased.

Key lenders cut their overnight dong loans VNIBOR to 11-13 percent on Monday, from 14 percent early this month.

The average rate for three-month interbank loans fell to 16.75 percent Monday from 16.96 percent last Friday, interbank rate fixings compiled by Reuters VNIBOS show.

CANY’S NOTE

Alain Cany, the Ho Chi Minh City-based chairman of the European Chamber of Commerce (EuroCham) in Vietnam, spoke about the State Bank of Vietnam’s move to lower its benchmark interest rate to 13 percent from 14 percent.

“Since July, nobody has been lending, and this creates a risk that even good businesses could go bankrupt. With inflation looking to be more under control, and given the world situation, I don’t think this damages the central bank’s credibility.

“If they are doing this now, they must feel very comfortable that inflation is under control. My understanding is that month-on month inflation this month may be flat. Their monetary policy is still pretty tight. This is just a small opening.

“A month ago, I thought it would be too soon to cut rates, but the world is changing quickly. Given the global situation, they may not have to fight inflation so much by themselves. Commodity prices are coming down.

“It’s still a little earlier than what I had in mind, but 1 percentage point isn’t that substantial. It’s good to do it step-by-step. They may cut again if the slowing-of-inflation-trend is confirmed again next month.

“The lending market has been frozen. They want to do something to re-establish a little bit of lending support to good businesses.”

 


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