What are the prospects for interest rates in late 2021?

The roadmap to tighten the short-term deposit ratio for medium and long-term loans may cause deposit interest rates for long terms to inch up 0.1-0.25%.

Monetary policy in 2Q is still consistent with the cautious loosening policy of the State Bank of Vietnam (SBV) throughout the period from the first Coronavirus outbreak until now. Specifically, the State Bank’s three times of lowering the policy rate are not as strong as other countries in the region, mainly using resources from commercial banks (through credit packages with preferential interest rates for businesses affected by COVID-19).

Meanwhile, the credit ceiling granted by the SBV to commercial banks this year is lower than the average level of previous years (the loosening of credit room will soon take place in 3Q, but it is highly likely that the new ceiling also will be lower than every year’s), leading to stable M2 growth with a slight downward trend. In general, the SBV maintained a prudent policy in 1H21 when inflation risks were existing due to the sharp increase in the prices of base commodities and materials.

While interbank interest rates rebounded in 2Q with overnight, one-week and onemonth rates gaining 80 bps, 90 bps and 90 bps respectively compared to the end of 1Q. This shows that the liquidity in 2Q was less abundant than that from the beginning of the year due to credit recovery and the absence of VND injection through spot foreign currency purchases. This is also the reason why Government bond yields, though still at historic lows, increased slightly compared to the end of 2020.

For the whole 2Q, deposit rates tended to move sideways and gained modestly for short terms (of under 12 months), while it inched up for long terms (13 months). However, the volatility range was relatively narrow (<0.25%), which means the deposit interest rate was quite stable and remainded at a low level, said KB Securities.

Although inflation pressure lowered compared to the end of 1Q, the SBV may hardly change its viewpoint about the current monetary policy and would maintain the moderately easing policy (low policy rates), while target credit growth will be stable equivalent to the growth rate in the pre-pandemic period (around 12%-14%). In KB Securities, the fact that a large amount of VND (estimated at about VND175,000 billion) will flow into the system's liquidity at the beginning of 3Q through the USD forward transaction conducted at the beginning of the year, will help the system's liquidity return to its current ample state, interbank interest rates cooled down and OMO channel would be infrequently used in 2H21.

“The credit supply may not see any significant fluctuations given prudent operating policies and moderate support of the SBV, credit demand is likely to be hit by the Coronavirus”, KB Securities forcasted, adding, the data on production and consumption activities were weaker in June and do not rule out the possibility of further decline in 3Q or the following quarters if the pandemic is not contained. Of the three scenarios proposed by the SBV for credit growth in 2021, the most negative scenario is that the pandemic lasts until the end of the year, and credit growth is likely to be in the range of 7-8%. Thus, while credit supply is stable, system liquidity is abundant, weak credit demand and low inflation risk will make it difficult for deposit and lending interest rates to rise sharply. However, the roadmap to tighten the short-term deposit ratio for medium and long-term loans, which will take effect in October 2021, will strengthen the level of deposit competition and may cause deposit interest rates for long terms to inch up 0.1-0.25%.