The local currency liquidity squeeze at banks has been relaxed in recent days on falling inter-bank interest rates, but lenders and experts see little chance of interest rates easing off their record highs in the coming months.

A deputy general director of a joint-stock bank said that in recent weeks, the central bank had stepped up U.S. dollar buying from commercial banks to improve dong liquidity in the banking system.

This is evident in the fall of interest rates on the inter-bank market where banks transact with one another. In recent days, inter-bank rates have slumped from 23%-24% per year to 16%-17% for one- and two-week tenors.

Meanwhile, banks have since early this week increased their U.S. dollar selling price by VND200 to the dollar. The exchange rate briefly hit the highest permissible level on Tuesday. The central bank has thus far bought US$1 billion from the banking system.

However, the above banker said the decline in interest rates on the inter-bank market would be short-lived as the central bank would take steps to bring back part of the dong amount used to buy dollars.

As the May consumer price index is forecast to stay high, at around 2%, the central bank will continue monetary tightening as expected by banks. Rumors have it that the central bank might launch compulsory bond issues to withdraw cash from the banking system and the liquidity crunch would continue as a result.

The central bank caps the savings deposit rate at 14% per year, but almost all commercial banks have broken this limit. Even the central bank has raised its funding rate for banks on the open market to 15% per year, higher than the ceiling deposit rate.

A business leader said a relative of a bank leader could enjoy a deposit rate of 19%-20% per year. With such a high cost of borrowing, the bank has to raise its lending rate to 23%-24% per year.

Small banks that do not have lots of valuable papers as collateral to get cheap funds from the central bank on the open market, still have to burden high borrowing costs. Forced to hike deposit rates to attract funds, small banks have had to apply lending rates of as high as 24%-25% per year.

The central bank is reportedly considering a ceiling lending rate, at 18%-19%, as a way to prop up the corporate sector battered by high interest rates. However, the leader of a bank said that if that was true, only State-owned banks would obey that because they get financial support from the central bank and a majority of their borrowers are State-owned enterprises.

Meanwhile, small banks which have to raise funds from the public and other banks at much higher rates cannot give loans at 18%-19% per year. Therefore, infringements of rules by banks as seen in 2008 may happen at any time and as usual, small enterprises would take a hit first, he added.

However, most economic experts said inflation would ease in the third quarter if the central bank was firm in its monetary tightening stance, then interest rates would decline. By then, enterprises will continue to grapple with the difficult business conditions.

Experts reiterated the Government should not rely much on monetary policy to tame inflation which is mainly caused by inefficient public investments. Fiscal measures should be taken as well to cope with inflation, they said.

Source: SGT