The strange moves of interest rates

Bank interest rates have been fluctuating wildly, and the strange moves seem to be making everything unpredictable.

At the end of December 2006 and in early January 2007, when VND was scarce, the overnight interest rate increased sharply, and then fell down, staying at 5% per annum.

At the end of June 2007, when the State Bank of Vietnam required higher compulsory reserve ratio, the overnight interest rate in the inter-bank market climbed to 7% per annum. However, the rate later fell dramatically to 3.5-4% per annum, even lower than the overnight rate applied for US$ loans at 5.25%, which has not been seen in the monetary market for a good many years.

A paradox exists: though banks’ usable capital is now profuse, they have still raised the interest rates on both VND and US$ deposits.

Though the stock market proves to be a good investment channel, commercial banks still can attract huge capital from the public. By June 30, 2007, banks in HCM City had mobilised VND377,500bil ($23,593mil) in capital, an increase of 32% over the end of 2006, while providing VND292,400bil ($18,275mil) in loans, an increase of 27.2%, according to the HCM City branch of the State Bank of Vietnam.

Banks have said that deposits made by both domestic and international institutions have been increasing sharply. Domestic and foreign investment funds have big sums of VND waiting for disbursement. A part of the money has been temporarily invested in Government and corporate bonds. Though the Government bond’s average interest rate has decreased compared to the beginning of the year, the rates remain relatively high, at 7.3-7.5% per annum.

Portfolio investment keeps flowing into Vietnam, though the VN Index has decreased in the last few months. Foreign investors expect to disburse their money for the IPOs of big corporations slated for the coming months.

Though usable capital is redundant, banks are not lowering the mobilisation rate, and are even raising deposit interest rates in order to attract more clients. Experts have said that traditional clients sometimes can get higher interest rates than the rates publicly declared by banks.

Experts say that interest rates have been pushed up as a result of stiff competition among banks. Several banks, which have shifted to operate as urban banks instead of rural banks, have to offer high interest rates to attract more clients.

The increased inflow of foreign capital into Vietnam has led to the temporary excess of foreign currencies. In the first five months of the year, the State Bank bought $7bil worth of foreign currencies, raising the foreign currency reserve to more than $20bil. In order to buy $7bil, the State Bank had to spend VND112tril, equal to 38% of total outstanding loans of all commercial banks in HCM City.

In order to control inflation, the State Bank has to withdraw cash from circulation through the open market and by auctioning valuable papers. In previous months, the central bank withdrew VND11,000-14,000bil ($687.5mil-875mil) a week, while the figure has risen to VND15,000-16,500bil ($937.5mil-1,031mil) a week after pessimistic predictions about the governments ability to keep the inflation rate below the GDP economic growth rate.

Experts have said that the sums of money the central bank withdraws every month will further increase if direct and indirect investment flows more strongly into Vietnam.

Source: VNE