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Banks reduce loan rates after benchmark rate lowered   2008-11-05 - Agencies

Banks reduce loan rates after benchmark rate lowered
State-run bank BIDV, Vietnam’s second-largest lender, Tuesday said it was trimming loan rates by up to 1.2 percentage points after the central bank announced its second rate cut in two weeks to support economic growth.



Share prices extended recent gains in response to the move.

The central bank said on Monday it was cutting three main interest rates and lowering the compulsory reserves required on bank deposits. The new rates, including a base rate of 12 percent, are effective today.

Hanoi-based Bank for Investment and Development of Vietnam (BIDV) said it dropped rates on short-term loans by between 1.0 and 1.2 percentage points, to now charge 16 percent.

However, businesses dealing with oil products, steel, cement, fertilizer and medicine would be able to borrow at a rate of 15 percent, BIDV said in a statement.

State-run Agribank, Vietnam’s largest lender, and other banks would cut their dong lending rates by up to 1.5 percentage points, the State Bank of Vietnam said Agribank’s dong loan rates would ease to between 15 percent and 16 percent from 16.5 percent and Vietcombank, the country’s largest partly private lender, would cut lending rates by 2.5 percentage points to 16 percent.

Lower lending rates could help boost lending, which was curbed by the central bank earlier this year when it was tightening policy to contain double-digit inflation.

Consumer prices in October fell 0.19 percent from September, the first monthly drop since March 2007. That still gave an annual inflation rate of 26.7 percent but the central bank has opted to loosen policy to support the economy, with the global credit crisis threatening a world recession.

Analysts said the reduction in compulsory reserves would give banks more funds, while their lower lending rates would help corporate borrowers, especially those in the real estate and financial sectors.

Cuts trigger warnings

But according to Standard Chartered Plc, Vietnam is risking its inflation-fighting credentials as well as possibly reviving overly fast economic growth by cutting interest rates twice in the past two weeks.

While annual inflation has slowed the past two months, the pace of price increases excluding food is “still relatively high,” wrote Tai Hui, Standard Chartered’s Singapore-based head of Southeast Asian economic research.

“Vigilance is still needed,” Hui wrote, in a note dated Tuesday. “The risk with such swift easing action is that the market could again question the central bank’s credibility in fighting inflation, and that the bank could run the risk of overheating the economy again.”

Vietnam’s government last week scaled back its target for economic growth in 2008 to 6.7 percent, down from a 7 percent figure that had already been cut from an initial goal for the year of as much as 9 percent.

Increases in interest rates earlier in the year and a subsequent slowing in inflation helped ease investor concerns after a second-quarter crisis of confidence in Vietnam, Hui wrote.

While Vietnam’s monthly trade deficits have narrowed, investors are still looking closely at Vietnam’s balance of payments position, he said in the note.

“Low interest rates are likely to undermine their appetite for Vietnamese financial assets,” Hui wrote. “With Vietnam considered a ‘frontier market’ within Asia, the risk is that financial investors will scrutinize the country’s economic policies and data even more closely than before.”

While Standard Chartered is bullish on Vietnam due to its political stability, rising consumerism and role in Asia’s manufacturing supply chain, “as the current global financial turmoil has yet to subside, it would be premature to give the ‘all clear’ to Vietnam,” Hui wrote.

“Current indicators suggest Vietnam is in stable condition,” Hui wrote. “However, solid and sound policies are required to further enhance its attractiveness to investors.”

Vietnam’s central bank may cut its benchmark interest rate again this year, Morgan Stanley predicted. Evidence of slowing inflation in Vietnam as well as a “rapid deterioration in the external landscape” has caused the central bank to move earlier than had been anticipated, Morgan Stanley said, in a note dated Monday.

“The central bank will likely continue on an easing path,” Morgan Stanley said, predicting a cut in the base rate to 11.5 percent by the end of the year.

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