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A new ceiling on USD deposit interest rates
The State Bank of Vietnam (SBV) has decided to increase the required level of foreign exchange reserves by 2% with a ceiling on USD deposit interest rates reduced to 3% per year.
Interest rates for USD likely to drop
The SBV decision will enable commercial banks to raise their lending interest rates or reduce deposit interest rates, even adjust both to ensure their profit margin. Businesses, therefore, will have to consider whether to borrow Vietnam dong or foreign currency.
The new ceiling on USD deposit interest rates is now 3 percent, much lower than the current 5 percent applied by commercial banks. It will reduce the attraction of foreign currency and people will encourage people to deposit Vietnam dong at a current interest rate of 14 percent per year.
Le Xuan Nghia, Vice Chairman of the National Committee for Financial Supervision, said that people tend to deposit in Vietnam dong instead of foreign currency when its deposit interest rate drops, helping to prevent businesses dollarising the national economy.
Duong Thu Huong, Secretary General of the Vietnam Banking Association, said that the SBV decision will benefit Vietnam dong depositors.
Concerns over liquidity
However, there remain concerns over the weak US dollar against the Vietnam dong caused by the SBV decision. The selling of foreign currency by both people and businesses will increase the national foreign exchange reserves but the narrow difference in interest rates between domestic and foreign markets will control the flow of foreign currency into the country.
Dr. Vo Tri Thanh, Deputy Director of the Central Institute for Economic Management, said that overseas Vietnamese tend to deposit in US dollar while staying in Vietnam as its current deposit interest rates are higher than those in other countries in the region.
If interested rates drop, USD inflows from overseas residents will slow down. Moreover, large amount of US dollars withdrawn from commercial banks will create an imbalance between the capital inputs and outputs and affect the liquidity.
A reduction in interest rates will also affect banks’ USD borrowings from the world market as they will have to take into consideration the difference in interest rates between the domestic and foreign currencies.
Under the SBV decision, the required rates for demand deposits and deposits with fixed terms of less than 12 months in foreign currency applicable for state-run and jointstock commercial banks, foreign-invested banks, enterprise banks, foreign banks’ branches will increase from the current 4 percent to 6 percent of the total deposit account.
The rates for the Banks for Agriculture and Rural Development, Central People’s Credit Fund, and cooperated banks will be 5 percent. The required rates for deposits with fixed terms of more than 12 months will be 4 percent of the total deposit account.
The new erquired level of foreign exchange reserves will take effect from May 2011.
The SBV decision to lower the ceiling on USD deposit interest rates to 3% per year took effect as of April 13.
tuoitrenews, vov
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