Lower lending rate remains a challenge

The State Bank of Vietnam (SBV) has little room for future policy rate reductions to support enterprises, notwithstanding the Fed's reduced magnitude of rate hike.

Commerical banks should focus on reducing deposit rates and operating costs to create more room to lower lending rates, in many expets' view.

>> Lending rates are under upward pressure

The Chief Economist of BIDV, Dr. Can Van Luc, predicted that pressures on the Vietnamese exchange rate would lessen as the FED's rate hikes and pressures on global inflation subsided. So, interest rates couldn't be increased as swiftly and forcefully as they once could. Additionally, the SBV recently published Circular 26/2022/NHNN, revising Circular 22/2019/NHNN to include a share of time deposits from the State Treasury for calculating the loan-to-deposit ratio (LDR). Due to this adjustment, State-owned commercial banks' total deposits have gone up by around 150,000 billion VND, which has increased their capacity to lend and improved their liquidity while easing pressure to boost deposit rates.

However, experts point out that the aforementioned sum is very tiny when compared to the about 12 million billion VND in total outstanding loans in Vietnam banking sector. Furthermore, the Circular 26/2022/NHNN predominantly helps big state-owned commercial banks, while smaller banks that struggle with liquidity must still rely on deposits and use interest rates as their main source of funding.

>> Lending rates expected to be stable thanks to State support package

Due to the global inflation this year as well as the postponement of prior monetary and fiscal easing measures, Vietnam is anticipated to encounter greater inflation pressures this year. Another factor to consider is the Federal Reserve (FED might continue slowing rate hike, but it has confirmed that it will not end the current monetary tightening cycle soon and will not cut rates in 2023. This stance may support the USD at a high level, provided that other central banks follow suit.

Dr. Nguyen Duc Do from the Academy of Finance noted that there is almost no room to loosen monetary policies to support the economy, and the SBV's primary task in 2023 is to control inflation. If high inflation occurs, interest rates will rise, negatively affecting business activities.

Although the pressure on exchange rates and interest rates has decreased since 2022, it is still difficult to reduce interest rates this year. Commerical banks should focus on reducing deposit rates and operating costs to create more room to lower lending rates.