Credit institutions would be asked to retain a ceiling interest rate of 14 percent per year on dong deposits to stabilise the country's monetary market and reduce the risk of inflation, said State Bank of Vietnam Governor Nguyen Van Giau on Dec. 25.

He made the comments in a statement read at a meeting held by the National Assembly's Economic Committee, to address concerns over recent high interest rates.

The committee chairman Ha Van Hien said the high interest rate had caused the consumer price index to surge in recent months.

Giau responded by stating that monetary policies set by the central bank this year had followed the Government's instructions.

His statement showed that the total money supplied for circulation accounted for 75 percent of targets approved by Prime Minister Nguyen Tan Dung. Total means of payment increased by 23 percent excluding forex and gold prices.

There was an increase of 15 percent in cash in circulation while credits experienced an increase of over 27 percent.

Responding to concerns about interest rate control, Giau said there were three different rates in the monetary market; the deposit and lending interest rate of credit institutions; the lending interest rate of those institutions in the interbank market and the preferential rate of the central bank.

The central bank had set and announced the basic interest rate for the dong deposits to control the market as stipulated in the Law on Banking.

He said the interest rate for dong deposits was low and less attractive than the rate for accounts in USD.

When the deputy head of the committee Le Quoc Dung suggested the lending interest rate could affect businesses and therefore the economy, Giau said this year's difference between the deposit and lending rate of 2.5 percent was acceptable given that the difference in 2008 was 4.62 percent.

Commercial banks could struggle if the difference were lower than 2.2 to 2.5 percent, he said, adding that a small error in monetary management policies could cause large shifts and even economic crisis.

The real yearly rate has been 1.47 percent, which was lower than in 2009, when the rate was 1.91 and 2006, when it stood at 2.23 percent, Giau said.

Capital supply had been decreased in the last two months because the lending interest rate was higher than the deposit rate. There had also been low liquidity in the interbank market.

Giau added that commercial banks had been competing to raise their interest rate for long-term dong deposits to attract as much idle money from the public as possible. This was because few depositors were interested in periods longer than three months.

The Governor said the central bank would take steps to stabilise the monetary market next year by limiting inflation to less than 3.5 percent in the first six months. Their aim was to retain the yearly rate of 7 percent.

This was fundamental to stabilise the market interest rate and gradually reduce it, he said.

He also said the central bank would tighten up the foreign exchange market, control gold price fluctuation and maintain forex changes at lower than the expected inflation rate.

The SBV would also try to ensure supply and demand for capital in the market, supervising operation of credit organisations.

Dung said Vietnam's high interest rate in comparison with other countries was abnormal and had negative effects on people's lives.

He asked the SBV to establish who was responsible for the banks' shortcomings and take remedial action.

He also said the central bank management had remained passive in the face of shifts in the market.

Former SBV Governor Cao Sy Kiem said interest rate policies needed to benefit banks, businesses and people.

National Assembly vice chairman Nguyen Duc Kien said the information contained in Giau's statement could assist the Government and ministries to map out macroeconomic policies in general, and monetary and financial policies in particular, to stabilise the economy./.