Economic analysts believe that the State Bank of Vietnam (SBV) will not raise the basic interest rate is that the central banks worldwide are maintaining low interest rates.

Low rates globally

Australia’s central bank has raised its prime interest rate to 3.25 percent from three percent, but most other banks, including those in the US and EU, are maintaining low interest rate policies.

The Chairman of the EU Central Bank has confirmed that it will maintain a one percent interest rate to stimulate economic development at least until the third quarter of 2010. Prior to that, the US FED also affirmed that it would retain its 0-0.25 percent interest rate.

HSBC Holding Plc, in its latest report, argued that Vietnam might raise interest rates like other Asian countries due to the higher deficit, higher inflation and weaker currency. It predicted that the State Bank of Vietnam would raise the basic interest rate to 11 percent by the end of 2010.

However, Lao Dong reported that the interest rate increase may not be seen prior to the third quarter of 2010.

Interest rates are set after considering many factors, including the trade deficit and inflation. Vietnam’s interest rates will depend on how the economic stimulus package performs, and especially on the achievements of the interest rate subsidy program.

It remains unclear if Vietnam will launch a second interest rate subsidy program. The matter has not yet been settled and requires further discussion; however, economic analysts say the basic interest rate will not be raised even if the second demand stimulus package is launched.

Balancing Acts

Businesses would be shocked if loan interest rates increase too sharply. Currently, they pay 6.5 percent per annum maximum and can enjoy the four percent interest rate subsidy.

High interest rates will lead to reductions in production, as businesses have just revived from economic difficulties. They have still not entered a strong development period, as domestic and international demand remain weak.

If the central bank does not raise the basic interest rate, banks in capital mobilization and liquidity will encounter more obstacles. Banks have already been facing problems with capital mobilization in the first ten months of 2009. The monthly outstanding loan increase has been lower than the capital mobilization increase by 6-8 percent.

The problem has become more serious in the fourth quarter of 2009, as banks have been hard pressed to mobilize public capital even though the deposit interest rate has risen to nearly 10.5 percent per annum.

People now prefer to put their money in other investments like stocks, gold and the real estate market, which they believe can bring higher profits than bank deposits.

Source: VietNamNet/LD