The interest rate in early 2017: Unusual?

	Credit growth reached 18.71% in 2016
	2016: Central rate rises by 1%, interest rate not reduced as expected.
	Striving for stabilization of interest rates in 2017

Interest rates increased due to seasonal factors. Photo: H. Diu.

Upward trend

As reported by the State Bank of Vietnam (SBV), in 2016, despite the pressure to push up interest rates, the rate was still stable because of flexible solutions of the State. Specifically, after increasing by 0.2-0.3% per year in the first 3 months of 2016, the interest rate was quite stable, especially from April 2016 to September 2016. Some credit institutions lowered the deposit rate of 0.3-0.5% per year and lowered the lending rate 0.5-1% per year for the manufacturing business or priority sectors.

In 2017, this "trend" tended to repeat because many banks have raised the deposit rate 0.1-0.3% per year and many banks have even raised the deposit rate 0.5% per year for customers with a large deposit in the long term.

Typically, Saigon Thuong Tin Commercial Joint Stock Bank (Sacombank) has raised their deposit rate 0.2% per year with a 2-month term from 4.9% to 5.1% per year and raised the deposit rate of 0.1% per year with 6-11 month term from 5.9% to 6% per year. Some commercial banks such as DongA Commercial Bank, Vietnam International Bank (VIB), Vietnam Prosperity Joint Stock Commercial Bank (VPBank), and Tien Phong Bank have also raised the deposit rate 0.1-0.3% per year in the short term. Currently, the deposit rate for less than 12 months is from 4.8% to 6.3% per year, while the deposit rate of 12 months or more is from 6.9% to 7.8% per year. Many banks even list deposit rate of up to 8% per year.

Along with an increase in interest rate of deposits, many commercial banks have also launched several major promotions to attract depositors from the early days after Lunar New Year holiday. Thus, the interest rate is quite similar to the trend in the same period in 2016.

Short-term pressure

According to reports on the operations of credit institutions issued by the Department of Statistics under the State Bank of Vietnam, financial and credit institutions have expected that the overall operations of the banking sector will improve in 2017. Credit institutions have also expressed their optimism on capital mobilization from the economy in 2017 because the macroeconomic environment is forecast to be more stable with a higher growth than the previous year, which further supports the liquidity of the banking system.

Therefore, the primary cause of an increase in deposit rates in 2017 is quite similar to 2016, mainly due to seasonal factors. Accordingly, the Lunar New Year is the peak month for enterprises and people to withdraw money for payment of salaries, bonuses and shopping. In addition, at the beginning of the year, there is a large amount of foreign remittances, so commercial banks tend to raise their deposit rate to attract depositors. Moreover, commercial banks want to be more active in raising funds to prepare for a new business season.

Another cause is that from 1^st January 2017, the rate of using short-term loans for long-term loans was reduced from 60% to 50% according to Circular 06/2016 / TT-NHNN amending some articles of Circular 36/2014/TT-NHNN on the limit to ensure safety in the operation of credit institutions. This has made banks focus on raising capital in the medium and long term, pushing up the deposit rate mainly in the long term.

Although the State Bank of Vietnam has announced that it can keep interest rates at a stable level, many economic experts are not optimistic about the possibility of stabilizing interest rates in the near future. Dr. Nguyen Tri Hieu - the financial expert expressed little optimism about the possibility of lower interest rates in the near future. Even, he raised his doubts about possibility of increasing interest rate because of the new monetary policy of the US Federal Reserve System (FED) under the control of US President Donald Trump. For the domestic economy, problems related to controlling inflation, ensuring growth of 6.7% for 2017 and removing bad debts will also create many challenges for the banking sector.

In fact, in addition to external factors, the internal challenges of the banking sector remain unchanged. Thus, many experts said that in order to handle the above problems, interest rates will be likely to decrease. This requires efforts from the financial institutions and relevant authorities, even resources from foreign institutions.

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In general, the pressure on interest rates of the banking system is quite high because Vietnam's economy has been strongly affected by the global economy. An increase in interest rates in the first months of 2017 may last in the short term as previous years, but the banking system should prepare all necessary measures to stabilize interest rates in accordance with the proposed objectives.