Interest rates expected to ease in September

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With improved bank liquidity, Vietnam's goal of reducing dong interest rates in September may be well within reach, according to local economists.

In early August, the State Bank of Vietnam's new governor Nguyen Van Binh said the central bank aimed to lower dong lending rates to between 17 and 19 percent beginning in mid-September. He said the aim was to have the lower rates last at least through the end of this year.

Cao Sy Kiem, former governor of the state lender, said the goal was feasible. "Liquidity at commercial banks has been better, although some banks have still broken deposit interest rate caps to lure customers."

Banks now have abundant capital as high lending interest rates have hindered many firms from borrowing, he said, adding that lenders have also been more wary of bad debt, thus lending more selectively.

Dong rates for manufacturing sectors ranged up to 21 percent in the week ended August 19, with loans for the agricultural and export sectors at 16.5-20 percent, according to the central bank's latest weekly report.

Another sign that interest rates could drop is the slowing monthly inflation rate, Kiem said. The consumer price index in Hanoi is estimated to rise 1.06 percent in August compared to one month ago, while the index in Ho Chi Minh City is estimated to increase 0.68 percent, the smallest hike since early this year.

"If interest rates are not lowered, many companies won't be able to continue doing business, and the economy could face the risk of both inflation and stagnation, which is very dangerous," Kiem said.

Nguyen Thi Mui, a member of the National Advisory Council for Financial and Monetary Policies, said there was no reason for interest rates not to drop amid lower inflation.

"However," she said, "how big or small the reduction will depend on many other factors."

Many commercial banks have said they no longer have much room for credit growth, which the central bank aims to cap at 20 percent for 2011. Meanwhile, their capital sourcing has improved, helping them to lend at lower interest rates, she said.

Another sign is that interbank lending rates have also been reduced, Mui said. The rate dropped to 11.75 percent on August 19 from 13.5 percent one month ago.

"Interest rates are likely to go down in September, because banks now have fewer customers," said Truong Van Phuoc, general director of commercial bank Eximbank. "The rates have slightly reduced in recent days."

Credit demand has decreased sharply due to high borrowing costs. Thus, commercial banks have to cut down their lending interest rates to attract customers, he explained. Many firms in Vietnam said they would not be able to survive if the cost of capital stands at more than 20 percent as it does now.

However, commercial banks could only reduce their lending interest rates once their deposit rates go down, Phuoc said.

Some small banks with weak liquidity are still increasing deposit rates to lure customers, so large ones are offering higher rates to compete with them, he said.

Truong Hoang Luong, vice general director of Kien Long Bank, said banks are keeping interest rates high to lure customers in the context of high inflation and rising gold prices. "Thus, whether or not the rates could be reduced as planned depends on the government's fight against inflation in the coming time."

To reduce interest rates, former governor Kiem said the central bank should use open market tools more flexibly, and encourage commercial banks to strengthen lending to good projects. He also said the government should take measures to curb inflation more effectively.

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