Rate talk continues to simmer

A floating interest rate mechanism can only be a matter of time, but calls for raising policy rates continue.

A floating interest rate mechanism can only be a matter of time, but calls for raising policy rates continue.

Govt leaders discuss inflation

Bankers and businesses want interest rate ceiling gone

Businesses miss opportunities due to high interest rates

An HSBC Asia economist Wellian Wiranto said Vietnam’s robust economic growth had been accompanied by price pressures and “we expect double-digit inflation in the coming months”.
“While the rate has been hiked once, by 1 per cent in November 2009, further tightening is still needed to counter inflation,” said Wiranto.

At the moment, a floating interest rate mechanism is under discussion and the rate is still capped within 1.5 times of the base rate currently set at 8 per cent. However, the State Bank allowed for medium and long-term lending rates to be freely set from March, 2010.

“At the moment, the State Bank is cooperating with other relevant authorities such as Ministry of Justice to work out a floatinginterest rate mechanism. It might come in a few weeks,” said Nguyen Thi Kim Thanh, head of the State Bank’s Banking Development Institute.

Wiranto said that in 2009, under the pressure from the global financial crisis, local authorities set out to insulate Vietnam from the chaos. As a result, its policy rate was halved and a massive fiscal stimulus programme was implemented, with a 4 per cent, per year interest rate subsidy on short-term loans.

“These emergency measures helped to secure 5.1 per cent growth in 2009, with a further spillover into this year – we expect 7.2 per cent growth in 2010,” said Wiranto. Thanh said the base rate’s role could change radically as soon as banks were allowed to float their mobilisation and lending rates.

Wiranto added that buoyant consumption increased imports as exports languished, adding further cyclical pressure on the structural trade deficit and exacerbating depreciation pressures.
In fact, some local financial experts are worried that increasing the market lending rate would place additional inflationary pressures on the economy if local enterprises have to pass on rising borrowing costs to selling prices.

However, while admitting that the cost of servicing debt would indeed naturally increase alongside increased interest rates, Wiranto argued that increased borrowing cost factor alone would push up production cost such that inflation would go up in tandem might be too narrow a view.

“First of all, unless there is zero competition in a specific industry, businesses will be quite hesitant to pass on this cost fully to the consumers, for fear of losing market share to their competitors.
“Second, it is extremely unlikely the interest servicing costs is the biggest cost item for most businesses, unless they are disproportionately loaded up with debt.

Other costs such as wages and input materials are likely to be the more important expenditure items for the businesses,” said Wiranto.

Source: VIR