During a regular Government meeting for the month of February, held on March 6, Binh said, “Under current conditions, measures to lower interest rates should be considered in terms of days rather than months."

According to Binh, the SBV will regulate interest rates in accordance with the Government’s efforts to tame inflation.

"Interest rates will be reduced by 1 per cent in the first quarter of this year. This trend could be maintained in the following quarters if it results in a reduction in the national inflation rate to less than 10 per cent for this year,” Binh emphasised.

Government bonds best selling, liquidity improved

Binh explained that the interest rate reduction is a result of the effectiveness of the Government’s macroeconomic policies applied during 2011 and the first two months of 2012.

In the fourth quarter of 2011, the SBV applied measures to lower the annual lending interest rate for production and manufacturing industires by between 1per cent and 2 per cent, to 17per cent-19 per cent. However liquidity has remained low, forcing several banks to borrow from the SBV to refinance.

Still, the situation has gradually improved during the first two months of this year.

“Despite economic difficulties, Government bonds have been selling. The amount of Government bonds bought by financial institutions across the country have increased by 15per cent in the first two months of 2012,” Binh shared.

Despite the high interest rates for Government bonds, at 11.27 per cent per year for three to five-year terms, many banks still opted to buy. This is evidence, he said, of improving liquidity as well as a possible decrease in interest rates as well as inflation in the future.

When interest rates across the board are decreased by 1 per cent, the ceiling deposit interest rate is also likely to be reduced by 1 per cent, he estimated.

Banks facilitated to boost lending

Up to now, interbank interest rates have decreased by 7 per cent, to a maximum of 14 per cent.

Overnight interest rates were lowered to 7 per cent-8 per cent. One-month term rates top the list with an interest rate of between 13 per cent and 14 per cent.

In the recent past, mostly temporary measures were applied to reduce interest rates and increase liquidity in banks, using market methods, with terms ranging from 7 to 14 days.

In the future, SBV's refinancing programmes will extend to terms to between 3 and 6 months in order to help financial institutions to realise their credit growth targets, Binh said.

The money supply will also be more strictly regulated in order to diversify credit sources and encourage lending.

"Thanks to a more stable foreign exchange rate it is now possible to lower interest rates and ensure healthy credit growth for banks," he added.

Source: VIR.