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Thursday, July 18, 2024

What causes interest rates to slide?

By Thuy Le

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Banks’ unexpected deposit rate cuts before and immediately after the Lunar New Year are explainable

Unexpected, yet understandable

The deposit rate bracket at Techcombank, effective from January 30, has undergone a drastic change, with a drop of 0.5 percentage point to 8.5% per annum for terms of 6-11 months and a decline of 0.3 percentage point to 8.7% a year for 12 months or longer. This is the bank’s first reduction in deposit interest rates since February 2022.

In mid-January, Sacombank lowered its annual interest rate by 0.3 percentage point to 5.7% for deposits of one month and by 0.2, 0.1 and 0.05 percentage point, respectively, for two-month, three-month and four-month savings, temporarily bringing down these terms from the ceiling of 6% per year as prescribed for deposits of less than six months.

Such a move by Techcombank or Sacombank, in particular, probably sketches the general picture of the market, while signaling that the pressure on capital mobilization at banks has significantly eased compared to earlier. This, in turn, paved the way for banks to consider cutting their deposit rates after they increased sharply and rapidly in the final months of 2022, in an interest rate race that had not been seen for quite a long time between banks.

The fact that banks brought down their deposit rates before and immediately after the Lunar New Year, though quite unexpected, is understandable in the context that many central banks around the globe have officially slowed down their interest rate hikes after realizing inflation has passed its peak, thereby lessening the pressure on interest rate policy management in emerging and developing economies.

Recently, at a policy meeting earlier this month, also the first meeting of the U.S. Federal Reserve (Fed) in 2023, the U.S. central bank hiked the federal funds rate by only 0.25 percentage point, after four consecutive hikes of 0.75 percentage point last year and an addition of 0.5 percentage point in December 2022.

Meanwhile, in Vietnam, the pressure for the State Bank of Vietnam (SBV) to further lift interest rates in 2023 has significantly decreased. FiinGroup, in its recent report, said the possibility of the SBV raising interest rates in the first quarter has dwindled given the recovery of the dong and the recent increase of only 25 basis points in U.S. interest rates.

Similarly, as per a report by Viet Dragon Securities Corporation, the exchange rate pressure was the main factor causing operating interest rates to pick up in 2022. However, this has cooled, laying the foundation for the SBV to keep its rates unchanged this year, along with the policy of holding back the rise in lending rates to support economic growth. In addition, with the inflation target for 2023 relaxed to 4.5% and the fiscal policy now sharing the burden with the monetary policy, the exchange rate is also expected to go down.

Supporting factors

Besides, compared to before, some supporting factors help interest rates significantly edge lower.

First of all, it is the seasonal factor. Credit operations in the early months of the year usually grow quite slowly, whereas there is often a great influx of cash into the banking system. This is due to savings at the beginning of the year, especially right before and after the Lunar New Year when workers are rewarded with extra cash and bonuses. Moreover, the need for capital for production and business during this time is very low.

For this reason, the liquidity pressure on the system is much more endurable at this time compared to the stressful period in the fourth quarter of 2022.

Moreover, with the channel for foreign currency purchase back on stream since mid-December 2022, when the Vietnamese central bank quoted the buying price for the U.S. dollar again after three months of leaving it vacant, there is the possibility of the dong liquidity having been supported and that it will continue to be more supported through this channel.

It should be noted that, in the past, the dong injected via the foreign currency buying channel was massive, significantly helping the system with its liquidity. However, in 2022, given the trend of the greenback soaring high in the international market and foreign currency supply and demand at home sometimes under pressure, the SBV had no choice but to reverse its policy by selling a considerable amount of foreign currencies as an intervention to aid the foreign exchange market.

Now, as the U.S. dollar is said to have peaked and be gradually cooling down, with the Fed no longer too keen on further raising interest rates, the SBV may seize this opportunity to replenish its foreign exchange reserves, especially now that foreign currency supply is constantly improving thanks to foreign investment inflows, a positive balance of the trade in goods and the peak season of remittances at the beginning of the year.

The trade balance is estimated to enjoy a surplus of US$3.6 billion this January, according to the General Statistics Office. This figure is highly encouraging, considering the total trade surplus of US$11.2 billion in 2022. Besides, tourism, another source of revenue in foreign currencies, brought in some 871,200 international arrivals to Vietnam last month, up 23.2% from December 2022 and 44.2 times higher than in the same period last year.

Last but not least, the new regulations on calculating the loan-to-deposit ratio (LDR), as recently revised by the central bank, also help relieve quite a few banks of the pressure for capital mobilization. Specifically, on the final day of 2022, the SBV issued Circular 26/2022/TT-NHNN amending and supplementing a number of articles in Circular 22/2019/TT-NHNN, which stipulates the limits and safety ratios in the operations of banks and foreign bank branches. With this, banks may take into account part of the time deposit of the Vietnam State Treasury when calculating the LDR and drawing up a schedule to gradually lower it.

Specifically, (i) from the effective date of this circular to December 31, 2023, 50% of the deposit balance is to be deducted; (ii) from January 1, 2024, to December 31, 2024, 60% is to be deducted; (iii) from January 1, 2025, to December 31, 2025, 80% is to be deducted; and (iv) from January 1, 2026, onward, 100% is to be deducted.

Earlier, in late 2022, the Vietnam State Treasury informed it was entrusting the central bank with nearly VND700 trillion as a demand deposit in accordance with the regulations of the Ministry of Finance. In addition, some VND270 trillion are being deposited with a term of one, two or three months at the four state-run banks (Vietcombank, VietinBank, BIDV and Agribank).

In 2022, with the growth in capital mobilization much lower than the credit growth of the whole industry, especially at each bank, the LDR at many banks was often under pressure to meet the prescribed threshold of 85%. Thus, banks felt obliged to lift their deposit interest rates to attract savings and sustain this ratio. Now, with the time deposit of the Vietnam State Treasury added to their capital sources during the calculation of the LDR, it will clearly have a positive influence on how banks shape their capital mobilization policy and determine their deposit rates.

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