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State Bank trims prime rate to 7% to spur economy   2009-01-24 - VNS

The State Bank of Viet Nam (SBV) lowered its benchmark interest rate by one and a half per cent to 7 per cent yesterday in the first reduction this year but the sixth since last October.

The reduction that will apply from Sunday, February 1, and is yet another effort to spark Viet Nam’s slowing economy.

Lenders will not be allowed to charge more than 10.5 per cent interest for dong loans from then.

The previous limit was 12.75 per cent.

The refinancing rate will be reduced from 9.5 per cent to 8 per cent and the discount rate, from 7.5 to 6 per cent.

Overnight interest rates for electronic and compensation payments at the inter-bank market will be reduced to 8 per cent from 9.5 per cent.

The interest rate for the compulsory dong reserve that banks must hold has been trimmed from a yearly 8.5 per cent to 3.6 per cent.

The reduction confirms the speculation early this month that the State Bank of Viet Nam would lower its prime rate to 7-7.5 per cent from 8.5 per cent.

Bankers asked for a response to yesterday’s decision agreed with Viet Nam News that a prime rate of 7.5 per cent would be reasonable. Any more could have made it difficult for the banks to manage their capital flows.

Although the central bank has just reduced the lending rate limit to a yearly 10.5 per cent, bankers expect it to stay at a yearly 6-7.5 per cent for the foreseeable future.

The SBV raised its benchmark rate several times early last year – from 8.5 per cent to 14 per cent; the refinancing rate from 6.5 to 15 per cent and the discount rate from 4.5 to 13 per cent to tame inflation.

But the deepening global economic malaise has negated the need for the campaign against inflation.

Instead, the central bank has continued to reduce the benchmark interest rate in an effort to hustle the domestic economy.

The central bank’s actions are expected to enable commercial banks to further reduce their lending rates and give enterprises, producers and traders access to much-needed capital.

SBV statistics collected from 40 cities and provinces and published late last year showed that more than 90 per cent of business-loan applications were approved.

The Government has targeted an economic growth of about 6.5 per cent this year and next – from 8.5 per cent last year.

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