Central bank raises deposit rate ceiling for second time in a month

The State Bank of Vietnam has raised the interest rate ceiling for deposits under six months to 6% a year, starting from Tuesday.

The central bank (SBV) announced late Monday a series of changes to their regulatory interest rates.

Accordingly, the maximum interest rate for demand deposits and those under one month has increased from 0.5% to 1% per year.

The rate for deposits from one month to less than six months has climbed from 5% to 6% a year.

Interest rates on deposits of six months or more are still set by banks based on market supply and demand.

Given the two latest adjustments, the interest rate ceiling for deposits under six months has returned to the pre-pandemic level and is equivalent to that in 2014.

The refinancing rate has risen from 5% to 6% a year, the rediscount rate from 3.5% to 4.5%, while the overnight lending rate in inter-bank electronic payment and SBV loans to cover capital shortfalls for credit institutions from 6% to 7% a year.

The SBV stated that the decision to raise the regulatory interest rates was driven by high global inflationary pressure and the strong appreciation of the U.S. dollar.

The US Federal Reserve (Fed) has revised up the benchmark interest rate five times to 3-3.25% a year and is forecast to continue raising the rates in the last months of 2022 and in 2023.

Besides, the U.S. dollar has appreciated strongly, putting pressure on interest rates and exchange rates in the domestic market, as well as inflation.

The SBV said in the coming time, it would closely monitor market developments in order to promptly and flexibly administer monetary policy solutions and tools. It said it was ready to intervene in the currency and foreign exchange markets to meet liquidity needs, contribute to stabilizing the market, and ensure the operational safety of the banking system.

Management pressure is weighing on the State Bank when it has to make a trade-off between controlling inflation, maintaining the Vietnamese dong price, and stabilizing lending interest rates.

By October 24, the price of the U.S. dollar at commercial banks has increased by more than 8.5% compared to the beginning of the year. The price on the black market has crossed VND25,000 for the first time.

Since the beginning of the year, the SBV has intervened in the forex market by selling more than 20% of the country’s foreign exchange reserve, and continuously adjusted the regulatory interest rates within the last one month.

While the impact of the increase in refinancing and rediscount rates is insignificant, raising the deposit rate ceiling will directly affect banks, businesses and people.

As the deposit rate ceiling has been raised, allowing banks to pay higher to depositors to attract deposits, the lending rates might get higher as a result.

Up to now, the interest rate for personal loans has risen to 13% and the figure for businesses is about 9%, up about 2% per year compared to the beginning of the year.

SBV Governor Nguyen Thi Hong said that the reduction of loan interest rates under the National Assembly's direction in the coming time would face many difficulties and challenges amidst global inflation pressure and monetary tightening.