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Removing ceiling interest rate to cure ‘anaemia’ of national economy
A scenario anticipated is that the State Bank of Vietnam would remove the ceiling VND deposit interest rate (now at 12% per annum). How will the interest rates perform then? Experts give the answers.
Bui Khac Son, General Director of Deposit Insurance of Vietnam: Interest rates still cannot be higher than CPI increases
It is necessary to have a suitable interest rate policy, which allows assurance of suitable profit for depositors, the affordable interest rate for lenders, and suitable income for bankers. The policy needs to be designed in the way to help cure the ‘anaemia’ of the national economy.
However, it still needs some more time to reach the goal of the positive real interest rate. The State Bank is trying to gradually raise the deposit interest rate in 1-2 months to make it equal to the CPI increase, and then add a small percentage of profit for depositors.
Le Tham Duong from the HCM City Banking University: Everything should be prepared for the ceiling interest rate removal
The State Bank should prepare for the removal of the ceiling interest rate scheme in order to avoid shocks to the market. It also has to amend the regulations on basic interest rates for banks’ easier application. Currently, the base interest rate is 8.75%, and in principle, the commercial interest rate must not be higher than 150% of the base interest rate, or 13.125%. This rate cannot ensure the positive real profit for depositors.
Once the ceiling interest rate scheme is removed, small banks will raise the deposit interest rates and offer promotion programmes to attract capital. However, the deposit interest rates will not go up all the time. High deposit interest rates will lead to high lending interest rates, and once the lending interest rates are unaffordable for businesses, they will not borrow money any more. Banks will not mobilize capital at any cost if they cannot find the borrowers.
Associate Prof Dr Tran Hoang Ngan from HCM City Economics University
Other countries in the world controls interest rates based on the basic inflation index. Unlike Vietnam’s CPI, the basic inflation index only counts on the monetary policy-related factors, while not including the price fluctuations due to the market supply & demand. For example, the unexpected increases of pork prices due to epidemics are not counted on when calculating the basic inflation index. Therefore, the basic inflation index is always 60-70% lower than the consumer price index. The positive real interest rate is understood that the interest rate is higher than the basic inflation index.
Other countries announce different indexes. CPI is used to balance the commodities on the market and pay to labourers, while the basic inflation index is used for the central bank to adjust the monetary policy. I think it is necessary to calculate and release the basic inflation index in Vietnam.
The management of the interest rate in accordance with the basic inflation index still depends on the purposes of the monetary policy the central bank pursues. Therefore, in many cases, the interest rate is lower than the basic inflation index.
Truong Van Phuoc, General Director of Eximbank: Lending interest rate must go in accordance with the Civil Code
People fear that once the ceiling interest rate is removed, the commercial interest rates will go up, causing difficulties for production. However, the Civil Code stipulates that the lending interest rate must not be higher than 150% of the base interest rate announced by the central bank.
The current base interest rate is overly low which the central bank needs to adjust. Supposing that the base interest rate is raised to 12%, then the maximum lending interest rate will be 18%. If so, commercial banks will set the lending interest rate at no more than 15%. In this case, we still can restrain the lending interest rate even when we remove the ceiling interest rate.
VNN
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