Banks cut interest rates to support economic recovery

Following Vietcombank's prior announcement of a rate cut, Agribank became the second bank to lower lending rates for new loans by 0.5%. Under recent instruction of the State Bank of Vietnam, credit institutions have begun to lower lending interest rates, in addition to debt restructuring for challenging clients.

"Our bank's agricultural and rural lending activities currently account for over 90% of market share in many localities. Particularly, loans to purchase and temporarily store rice have very low-interest rates", stated Pham Toan Vuong, General Director of Agribank. 

The central bank has lowered operational interest rates three times since the beginning of 2023 to help credit institutions lower lending rates in the market, with the latest time on May 23. 

The State Bank of Vietnam's reduced interest rates will be in effect. Since the start of 2023, there have been three rate reductions.

The maximum interest rate for demand deposits with periods of less than a month will stay at 5% per year, while interest rates for deposits with terms of between a month and six months will be decreased from 5.5% to 5% per year.

According to Ly Kim Chi, Vice President of the Ho Chi Minh City Business Association, loan interest rates have decreased but not much, about 10% annually. "In order to further encourage the decrease in lending interest rates, we advise the State Bank of Vietnam to cut its operational interest rate by 0.5% annually starting May", she added.

This suggestion demonstrates the ineffectiveness of the recent business assistance policies. The market noted that many firms found it too challenging to sell collateral in order to keep up production. Some banks have provided special loan packages, but firms cannot obtain them because of the requirements.

This situation takes place in the context that in Ho Chi Minh City, in April, the number of enterprises suspending operations increased by 23.88% over the same period last year, and the amount of foreign investment also decreased by 23.45%.

According to the Ho Chi Minh City Business Association, due to the lack of a market, roughly 50% of businesses produce sparingly, retain employees, and have little financing demands.

Like Ho Chi Minh City, Vietnam's economic indicators were not positive. In the first 4 months of 2023, the index of industrial production (IIP) was estimated to decrease by 1.8% from a year earlier (in the same period in 2022, it increased by 7.8%).

In April, the purchasing managers' index (PMI) of the manufacturing industry dropped sharply to only 46.7 points, the second consecutive month that Vietnam's manufacturing PMI was below the threshold of 50 points. manufacturing activity is shrinking. Besides, the import and export of goods, which is always a bright spot of the economy, also slowed down in the first months of the year.

"According to feedback, the State Bank of Vietnam will consider conditions in the coming time, and if possible, it will further reduce the operating interest rate," said Governor Nguyen Thi Hong.

According to Dr. Le Xuan Nghia, former Vice Chairman of the National Financial Supervisory Commission, there are signals that create opportunities for the State Bank to continue reducing interest rates. Specifically, although the US Federal Reserve (FED) raised interest rates by 0.25 percentage points, the market predicted that the US would no longer be able to raise interest rates because if it did, the US economy would not be able to continue raising interest rates.

Along with that, the USD is expected to remain in a downtrend. At the same time, the market expected that the FED might start reducing its operating interest rates from the fourth quarter of 2023, earlier than the previous forecast in the first quarter of 2024.

Exchange rate pressure decreased significantly and foreign exchange reserves increased by $4 billion, creating room for the decision to cut interest rates to support economic growth. Many banks had to sharply reduce deposit interest rates due to excess liquidity. The credit growth rate of the economy in the first quarter of 2022 is about 2%, higher than the rate of 1.26% in 2021, but much lower than the 5.04% growth rate of the same period in 2022. as the average for the period 2013-2022.

In the face of continued concerns about economic difficulties, the authorities have offered a series of policy support, including a credit package of VND120,000 trillion for social housing, a 2% reduction of VAT to the end of 2023, and plans to restructure some loans. In particular, there have been some early signs of easing policy stance towards the real estate industry, which has been facing a liquidity crisis since October last year.

This is one of the factors creating pressure for lending interest rates to drop sharply in the coming time. Many forecasts show that the falling point of interest rates will be in the second quarter when the momentum of increasing interest rates by central banks is stopping.

According to the analysis of Bao Viet Securities Company (BVSC), the pressure from inflation and the exchange rate has now eased, allowing monetary policy to be managed in a supportive direction for growth.

“Therefore, we expect the State Bank to further reduce interest rates, bringing deposit interest rates down to a lower level, thereby helping to reduce lending rates and stimulate credit growth in the coming time”, the BVSC report emphasized.

Obviously, if monetary policy and fiscal policy do not have more positive actions to support the recovery of growth momentum, the economy is at high risk of continuing to plunge in the second quarter.