Economists expect removal of deposit rate cap this year

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Economists forecast that the central bank will completely remove the interest rate cap on dong deposits soon as the banking system escapes liquidity problems in the third quarter.

The central bank has allowed commercial banks to negotiate interest rates with their clients for long-term deposits of more than 12 months since June 11.

Professor Le Tham Duong of the Ho Chi Minh City Banking University said this policy signals a complete removal of all limits on deposit rates, even though banks are still subject to a short-term deposit cap of 9 percent.

If the State Bank of Vietnam is able to deal with all remaining weak lenders this month as planned, it is feasible to eliminate the ceiling without prompting a race among banks to compete for deposits, Duong said.

Vo Tri Thanh, deputy head of the Central Institute for Economic Management, a government think-tank, said the central bank can get rid of rate caps once liquidity of the banking system has improved and the interbank market stabilizes.

"These issues are likely to be solved in the third quarter and if the economy has become stable by then, it is no longer necessary for the central bank to maintain the deposit rate limit," he said.

However, economist Nguyen Van Thuan said that without a rate cap, there might be some chaos in the banking system if certain banks are still weak and need to raise funds at high rates.

The central bank should tighten surveillance over these weak lenders to prevent them form negatively affecting the system as a whole, he said.

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