Borrowing costs face upward pressure

Interest rates increased sharply in the interbank market in the last few weeks of December 2013, revealing a huge demand for liquidity at banks.
Interest rates increased sharply in the interbank market in the lastfew weeks of December 2013, revealing a huge demand for liquidity atbanks.

According to the State Bank of Vietnam, in the last weekof the month, VND transactions on the interbank market were worth 128.47trillion VND (6.12 billion USD), most of them for overnight (48percent) or one week (29 percent).

But the interest rates on bothVND and USD borrowings have risen sharply. It was 0.79 percentagepoints up from the previous week for dong loans at 2.23 percent peryear.

However, they did not come as any surprise since a rising trend had begun several weeks earlier.

Demand for cash often increases at the end of the year as people need more money to do shopping.

Besides this, the central bank has also been pumping money through open market operations (OMO).

By December 27, it had injected 14.73 trillion VND (701.43 millionUSD) during the month. In previous months the flow had been negative tothe extent of 102 billion VND (4.86 million USD).

Clearly, thecentral bank is ready to intervene in the market to prop up the bankingsystem's liquidity and keep the interbank market stable.

Not surprisingly, banks have also begun a new race to increase deposit interest rates.

Sacombank offers the ceiling interest rate of 7 percent – applicablefor deposits of up to six months – for one to five months, and 7.3percent for six to 11 months.

Asia Commercial Bank offers 6.9 percent for deposits of one to two months. Eximbank offers 8 percent for a one-year term.

Some small banks in Hanoi are ready to offer 9 percent for a year on deposits of 200 million VND (9,529 USD) or more.

With the deposit rates rising again, lending rates are likely to be under pressure too this year.

A senior economist said besides the rising deposit interest ratesthere are also other reasons that would keep loan interest rates fromfalling in 2014.

They include a predicted inflation rate ofaround 7 percent, meaning the coupon rates on Government bonds have beenfixed at a level that banks find attractive.

The US dollar is likely to strengthen, affecting the interest rates and exchange rates, he added.-VNA

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