Interbank interest rates rise as Vietnam regulator squeezes excess liquidity

Interest rates in Vietnam’s interbank market have risen in recent days as the banking regulator remains aggressive with excess liquidity, aiming to limit the weakening of the dong.

Interbank rates have increased 0.3-0.45 percentage points from late last week. According to the SBV’s latest data, the overnight rate was 0.79% on Thursday and the rates for one-week, two-week, and one-month terms were 1.02%, 1.20%, and 1.55%, respectively.

The country’s central bank raised VND1.65 trillion ($67.35 million) from selling 28-day treasury bills on Friday, the lowest volume since the regulator resumed this operation on September 21 after a six-month hiatus.

Meanwhile, the winning rate jumped to 1.45% per year, the highest level over the past month, indicating that excess liquidity is drying up.

On the previous day (October 19), the volume of T-bills sold dropped to VND4.25 trillion ($173.5 million) while the winning rate spiked to 1.45% from 1.0% a day earlier.

The SBV has withdrawn a total of VND261.6 trillion ($10.68 billion) since September 21. With the T-bills issued on September 21 and September 22 becoming due, the SBV pumped back VND20 trillion ($816 million) into the system on Thursday and Friday, resulting in a net injection of VND14.1 trillion ($575.5 million).

Outstanding T-bills totaled VND241.6 trillion ($9.86 billion) as of Friday. Liquidity in the banking system will rise proportionately if the SBV ceases issuing T-bills.

According to analysts, the SBV’s aggressiveness on T-bill issuance is aimed to regulate liquidity in the short term, thus pushing up interbank interest rates on dong-denominated loans and narrowing the spread with rates on USD-denominated loans.

The move, in turn, has helped reduce pressure on the USD/VND rate without tapping the bank’s forex reserves.

Despite massive dong withdrawal, USD prices at commercial banks have increased VND150 from the start of this month. As of late Friday, Vietcombank, the largest forex trader in Vietnam, quoted the greenback at VND24,360 for bids and VND24,700 for asks, down VND10 on each side from Thursday.