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Contriving to cut interest rates
Borrowers complain that interest rates are unaffordable, while bankers, for many reasons, do not offer the rates businesses want. Associate Prof Dr Tran Hoang Ngan from HCM City Economics University talks about the issue.
In order to fight inflation, the macroeconomic policy aims to reduce demand, and maintaining high interest rates proves to be the most effective measure for this goal.
However, the situation has changed. Investment demand has decreased, while there have been signs of supply shortage. As businesses have limited investments, this will cause unemployment, thus affecting economic growth in the future. The currently applied high interest rates were seen in the 1980s. It is now necessary to prevent the national economy from slipping into a worse situation, one of high inflation and economic growth rate decline at the same time.
However, in order to slash lending interest rates, banks will have to cut deposit interest rates. Do you think that it is reasonable to cut deposit interest rates now while the inflation rate remains high?
Other countries in the world also have high inflation rates, but none of them have such high interest rates like in Vietnam. There is a difference in the interest rate policies of Vietnam and other countries. Countries define interest rates based on the basic inflation rate instead of the consumer price index (CPI) like Vietnam. The basic inflation rate does not consider the fluctuations of petrol and food-foodstuff prices, while the CPI considers these factors. It is necessary to exclude petrol and food-foodstuff price fluctuations, because the prices may increase unexpectedly for some reasons one month, and then decrease the next month. The price fluctuations do not originate from monetary reasons.
If deposit interest rates are higher than the CPI to ensure profit for depositors, businesses will not be able to afford the high interest rates.
Previously, someone suggested declaring the basic interest rate and not declaring CPI. However, I think that it is still necessary to keep declaring the two indexes. The CPI serves the calculation of salaries and the basic inflation rate serves monetary policy regulation.
The US, Japan, China and other countries all have basic interest rates lower than their inflation rates. Thailand’s CPI is 9.2%, while the basic inflation rate is 3.5%, and banks are now mobilising capital at below 3.5%.
What do you think are suitable deposit and lending interest rates for now?
The basic inflation rate in Vietnam is estimated at 11-12%; therefore, the deposit interest rate of 14% would ensure profit for depositors, while a suitable lending interest rate would be 18%. Meanwhile, banks currently lend at 19-21% and mobilise capital from the public at 18%.
Banks have been trying to slash interest rates, but they still cannot make sharp cuts. What do you think is needed to settle the problem?
The State Bank of Vietnam needs to create favourable conditions for banks to slash lending interest rates. In the immediate time, the central bank should consider paying interest on the 6% increase in the compulsory reserve ratio, which was raised in mid 2007 (the current required ratio is 11% and it was 5% before mid 2007). The compulsory reserve has pushed capital costs up. Banks only can make profit if they mobilise capital at 17.5% and lend at 21%.
Commercial banks also need to reconsider their deposit interest rates, and returning the interest rates on short-term deposits to normal, while they should not set the same rates for short-term and long-term deposits as they are doing currently.
The government has been trying to bring the CPI down to a one-digit level by 2009. How do you think inflation will be in the time to come?
The measures to curb inflation need more time to show their effects. It is likely that in the second quarter of 2009, the State Bank will lower the compulsory reserve ratio and set up a roadmap to bring interest rates to the rates seen in 2007.
VNN
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