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Interbank market bustling, interest rates high   2008-08-22 - VNA

The State Bank of Vietnam last week began sharply reducing the supply of money through open market operations (OMO), after the money deposited by commercial banks at the central bank had increased considerably. As a result, the interbank market has become more bustling with more transactions, which have also pushed interest rates up.

 

The State Bank of Vietnam last week began sharply reducing the supply of money through open market operations (OMO), after the money deposited by commercial banks at the central bank had increased considerably

Some banks still need to borrow short-term capital to serve their business, while some other banks, which have temporary idle capital, need to lend money.

 

Currently, the interest rates in the interbank market are at 17-17.5% per annum, higher than the 15-15.5% levels last week. The State Bank now pumps VND2,000bil only a day into circulation through OMO, much lower than VND4-5,000bil a day in previous weeks, and VND10tril a day in the period from May to July.

 

A State Bank official said that the money deposited by commercial banks at the central bank has increased recently, which shows the improved liquidity of banks. Therefore, even when the central bank reduces the money supply through OMO, commercial banks are still able to manage.

 

In fact, OMO remains the channel through which the central bank provides short-term local to commercial banks. As such, with the reductions of the money supplies through the channel, the central bank is trying to withdraw money from circulation. This helps reduce money supplies, which eases the pressure on inflation. Moreover, the weaker capital flow from the State Bank will also help create new outlets for the capital of some banks which now have idle capital.

 

In the last couple of weeks, banks have accepted providing longer-term loans in the interbank market (three months at maximum), while they lent for one month at maximum in May and June 2008. At that moment, banks did not have much usable capital, while the banks which had capital did not want to lend to others.

 

Analysts say that banks that have profuse capital can lend to other banks as the loans can bring higher profit if the central bank cuts the basic interest rate before the loans fall due. If the central bank cuts interest rates, the interest rate in the interbank market will fall, reducing the banks’ profit.

 

August will end in ten days and the State Bank will announce the interest rate for September.


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