Monday, 19/10/2015 14:34

Should the interest rate be cut or the exchange rate stabilized?

In order to keep the interest rate gap between the USD and the VND attractive, the interest rates for the VND have not been reduced.


Surprisingly, while the Consumer Price Index (CPI) has increased very slowly or has decreased, the deposit interest rates have remained unchanged.

The General Statistics Office (GSO) announced that the CPI in September decreased by 0.21 percent compared with the month before.

The figure did not surprise analysts, who had heard that both Hanoi and HCM City had reported minus inflation rates in their localities.

However, the deposit interest rates remained high. As a result, the real positive interest rate has increased to 5-6 percent.

This means the real profit that depositors can pocket after deducting the CPI increase is 5-6 percent per annum. In previous years, the figure was just 2-4 percent.

Analysts believe that the interest rates won’t be decreasing towards the end of the year. They think that it would be a success to curb the current interest rates.

The State Treasury had to raise the offered interest rate slightly by 0.15 percent at the latest government bond auction. However, despite the higher interest rate, it could only call for 18 percent of capital needed.

Why has the interest rate stayed high? The answer lies in the exchange rate policy.

Analysts noted that businesses still have to pay high for the capital cost because the government now focuses on stabilizing the VND/USD exchange rate.

In other words, the plan to cut interest rates to ease the financial burden on businesses has to be sacrificed for exchange rate stabilization.

After devaluing the VND sharply in August, the State Bank of Vietnam (SBV) repeatedly stated that no further devaluation would be made to the end of the year, even if the US Federal Reserve raises the prime interest rate.

In the latest news, SBV has slashed the ceiling dollar deposit interest rate to zero percent and 0.25 percent for institutional and individual depositors, respectively, from the previous 0.25-0.75 percent.

The aim of the move was clear: SBV wanted to eliminate the motivation for people to hoard the USD.

The move, which helps widen the interest rate gap between dong and dollar deposits, will make the dong more attractive, thus discouraging people to keep the dollar.

Deputy Head of the Central Institute for Economic Management (CIEM) Vo Tri Thanh also believes that he cannot see any possibility of the interest rate cut in the short- and medium-term.

He said though Vietnam has devalued the VND sharply, the pressure on the exchange rate still exists because other countries have continued to depreciate their currencies.

Though Thanh sees pressure on the VND/USD exchange rate, he believes the central bank is capable of fulfilling its commitment not to devalue the VND until early 2016.

vietnamnet
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