As inflation continues to rise, banks are finding it increasingly difficult to meet government demands to lower interest rates, experts say.
Cao Sy Kiem, former central bank governor and a member of the National Financial and Monetary Policy Advisory Council, said local banks had agreed to bring down deposit rates to 11 percent this month so that lending rates could be lowered as well.
However, many small banks continue to set their rates higher than the committed level in an effort to remain competitive, he said.
The Vietnam Banks Associationï¿½s 11 percent cap was set to achieve government targets. Prime Minister Nguyen Tan Dung in May asked the State Bank of Vietnam to lower deposit rates to 10 percent and cut borrowing costs to 12 percent to spur economic growth.
ï¿½The banking consensus has caused interest rates to go against the nature of the market, and as a result banks will try to dodge it to save themselves,ï¿½ he said.
Now that inflation has accelerated, itï¿½s even harder for banks to cut rates because their clients would switch to investing in dollars and gold to earn better profits, said Kiem.
Several experts have said that Vietnam is not likely to keep inflation below this yearï¿½s 8 percent target. According to the General Statistics Office, consumer prices rose 1.05 percent in October over the previous month and 9.66 percent over the same month last year.
The government said inflation has already risen 7.58 percent in the first ten months. In order to stay below the 8 percent ceiling, consumer prices must not increase higher than 0.42 percent in the final two months.
Duong Thu Huong, chairwoman of the Vietnam Bank Association, said inflation may reach 9 percent by the end of the year.
In that case, deposit rates of 11 percent will still keep real interest rates ï¿½ the difference between the interest rate and inflation ï¿½ in positive territory, she said.
But if gold prices and the dong-dollar exchange rate continue to fluctuate erratically, the 11 percent would not be attractive enough, Huong said.
ï¿½When there is further downward pressure on the dong, the goal to lower interest rates is hard to realize,ï¿½ she said.
Vietnam has devalued its currency three times since last November. Last week, central bank governor Nguyen Van Giau rejected market rumors of another dong devaluation.
Kiem said the government needs to take measures to control inflation to stabilize the dong. It should also support small banks through open market operations so that they donï¿½t find themselves trying to woo depositors at all costs, he said.
Huong said the bank association is watching the market carefully. If commercial banks continue to struggle to attract deposits and inflation remains high, the association may ask the government to revise its original target for interest rates.
In the meantime, banks are already facing the pressure.
A bank director who requested anonymity told Thanh Nien that, after his institution agreed to cut interest rates, deposits fell sharply. The bank just issued VND1.1 trillion worth of promissory notes, promising to pay an interest rate of 11.2 percent, higher than the industry rate cap.
Original Post: Business >> Vietnam banks struggle to cut interest rates as inflation bites