Interest rate cut expected to pump economy up

The State Bank of Vietnam (SBV) is cutting down a series of key interest rates by 0.25%-0.5% from June 19, which is expected to make a double impact on the economy thanks to stronger credit activities and higher liquidity.

According to experts, the four major reasons behind the SBV’s decision are Fed’s ending of interest rate hike after 10 consecutive increases, a downturn trend of inflation since February, the stable domestic currency demand and stronger liquidity of the banking system, and a drop in exports and investment in industrial production in May.

In the domestic market, the pressure on interest rates and exchange rates has been significantly eased. In fact, the interest rate level in Vietnam has decreased by 1%-1.5% and the USD/VND exchange rate even slightly decreased by 0.57% compared to the beginning of the year.

Dr. Nguyen Huu Huan from the Ho Chi Minh City University of Economics said that the SBV’s decision will create a boost to the economy, providing favourable conditions for the people and businesses to access capital at lower interest rates.

Associate Prof. Dr. Dinh Trong Thinh held that the SBV’s reduction of interest rates for four times in a row within only four months will enable commercial banks to cut their deposit interest and lending rates.

Thinh underlined that there is a high hope that the rates in the economy will return to the 2019 level by the end of this year, but with the reduction speed recorded recently, the scenario may happen by the end of the third quarter.

The reduction of the ceiling lending interest rate was also welcomed by businesses. Tran Duc Nghia, General Director of Delta International Company, said that the SBV’s move to reduce interest rates for the fourth time in a row will certainly bring down the lending interest rates, thereby reducing the loan cost for business. In particular, this is a reduction in operating interest rates, not a single interest rate reduction by a few banks, which means all businesses will benefit.

More over, not only businesses, individual customers will also benefit from the reduced lending interest rates, which is expected to encourage consumption, production and business activities, resulting in a double impact on the economy, Nghia underlined.

SBV leaders said that the cut in interest rate ceiling for short-term VND loans will create favourable conditions for businesses and people to access low-cost loans for production and business in priority areas and key areas playing the role as a driving force for economic growth in accordance with the Government’s policy.

Nguyen Xuan Thanh, a senior lecturer of Fulbright University, said that although the operating rate has been reduced four times, it has yet to be enough to make an impact on the economy as the capital expenditures of banks are still high, while many firms have still had no access to capital.

Economist Can Van Luc held that inflation is not a really big problem now as world inflation and prices are falling, while the exchange rate has remained stable, along with weak demands and slow money cycle. But he still stressed the need to enhance the coordination efficiency among the policies, especially monetary, fiscal, price policies and other macro-economic ones to actively rein in inflation and ensuring macroeconomic stability.

Leaders of the SBV affirmed that the bank will continue to pay attention to dealing with the inflation pressure, while keeping a close eye on the domestic and global situation to direct credit organisations to cut cost and reduce lending interest rates so as to support businesses during the recovery and development process.

However, experts held that interest rate cut is not the “universal key” to “unlock” credit, promote cash flow, recover consumption, and boost economic growth. They pointed to the need for the stronger fiscal policies to encourage consumption and production, as well as the speeding up of public investment to support businesses and the economy.