The interest rates announced by the State Bank of Vietnam had been stabilized for a long time until they were raised in February 2008. In 2006, 2007 and January 2008, the base interest rate was kept at 8.25% per annum, the recapitalization interest rate at 6.5% and discount interest rate at 4.5%. Since February 2008, the rates have been raised to 8.75%, 7.5% and 6% per annum respectively.

A question has been raised about why the interest rates announced by the State Bank of Vietnam do not have any impact on the monetary market. Why do the central bank’s interest rates only increase slightly, but commercial banks’ rates increase sharply?

In principle, the base interest rate of the State Bank is the lending interest rate to best clients applied by selected commercial banks (mostly state owned banks and some big joint stock banks).

There are several ‘strange things’ with the interest rate policies which are now being applied in Vietnam.

First, the deposit interest rates now applied by commercial banks are now much higher than the base interest rate, 12% per annum, which is 1.4 times higher than the base interest rate.

Second, the lending interest rate to best clients applied by the selected commercial banks now is 15% per annum, or 1.72 times higher than the base interest rate.

It seems that the State Bank’s announced base interest rates do not make sense on the monetary market. Several months ago, in an interview with the press, the then director of the State Bank of Vietnam also acknowledged that the base interest rate does not help regulate the market, and it is used only for reference.

Though the State Bank of Vietnam announces the recapitalization and discount interest rates, the central bank does not carry out the activities of refinancing credit institutions regularly, and it only provides capital in necessary cases to help improve banks’ liquidity. Moreover, it seems that only state owned banks can enjoy the two services, while joint stock companies, joint venture banks and foreign bank branches cannot.

Source: TBKTVN