June 05, 2020 15:25

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Reducing operating rates: Medium and long-term impact

09:07 | 29/03/2020

VCN - After many countries in the world lowered interest rates, the State Bank of Vietnam (SBV) has also sharply reduced the operating interest rate from 0.5 to 1% per year. This is considered a timely solution to help banks have more capital, remove difficulties for production and business in the context of the Covid-19 pandemic.

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Lowering the operating interest rate helps to spread and lower the lending interest rate for businesses. Photo: S.T.

Regulating timely and appropriately

According to the State Bank's decision, from March 17, a series of operating rates such as refinancing, overnight interest rates decreased by 1%/year, rediscount interest rates decreased by 0.5%. The basic interest rates only decreased slightly: The deposit rate ceiling decreased by 0.25-0.3%/year, the short-term interest rate ceiling with priority fields decreased by 0.5%. The SBV explained that this action is in line with macroeconomic developments, international financial markets and removing difficulties for production and business in the context of the complicated Covid-19 pandemic and negative impacts on a global scale. The reduction of interest rates will create mechanisms, policies and solutions to help credit institutions with abundant liquidity and have more conditions to support businesses.

In fact, many countries around the world have sharply reduced interest rates, and manycountries have left negative interest rates. For example, the US prime interest rate drops to 1-1.25%; UK is only 0.25%; Australia is 0.5%; Canada is 1.25%; Japan is -0.1%, European Central Bank - ECB is -0.5%.Therefore, from the perspective of experts, the reduction of SBV's operating interest rate is considered a good solution – the reduction is reasonable and appropriate in the context that the world economy is experiencing many instabilities and difficulties, many central banks in the world have been reducing interest rates, especially the US Federal Reserve (Fed) reduced interest rates. According to Dr. Bui Quang Tin, CEO ofBizlight Entrepreneurship School, lecturer at Banking University of Ho Chi Minh City, SBV reduced operating rates in correlation with other macroeconomic indicators, especially inflation in the first two months of this year were higher than many years ago. Moreover, many experts also believe that Vietnam's economy and businesses are also strongly affected, so this action will spread to the lending interest rates for individuals and businesses, helping to reduce cost and increase access ability to loans.

In the middle of March,on the open market operation channel (OMO), the State Bank doesn’t carry out issuing activities and there were no matured bills and outstanding treasury bills at 147,000 billion dong. Therefore, experts of Bao Viet Securities Company (BVSC) said that the interest rate action of the State Bank combined with the stopping of net withdrawal will help the liquidity of the interbank system become more abundant and help financial support for commercial banks in difficult times due to the Covid-19 epidemic.

Concerning about latency

Despite appreciating the SBV's move, experts are concerned about the latency of the policy, meaning businesses can’t benefit immediatelyfrom loans. In the current context, Dr. Can Van Luc, economic expert, said businesses are in desperate need of immediate support, while reducing interest rates is slow. In addition, the current reduction in interest rates will not support new lending when the ability to absorb capital of the economy is weak.

BVSC experts also commented that the reduction of interest rates for refinancing, rediscounting, overnight lending in inter-bank electronic payment and lending to compensate for capital shortage in clearing mostly to support liquidity for the system, reduce short-term interest rates in the interbank market. However, the degree of linkage of these short-term interest rates to the actual lending interest rate level in Vietnam is quite limited. Besides, the reduction of the ceiling interest rate from 6% to 5.5% may partly affect the interest rate and interest expense (NIM) of banks in the near future.

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A number of commercial banks have lowered their interest rates on savings accounts by 0 1 0 ...

However, in the current economy, both short- and long-term supportive activities are also important for us to maintain our growth targets. It is important that the Government and the State Bank of Vietnam regulate the monetary policy carefully, because at this time banks have large-scale credit programs, the interest rate reduction is not urgent. On the other hand, many businesses also said that, in addition to reducing interest rates, the management agencies should urgently implement groups of measures to extend or postpone the repayment obligations of people and businesses. This means that fiscal policy should take precedence over monetary policy, due to immediate effectiveness and less latency.

By Huong Diu/ Quynh Lan