Finally, on July 11 the State Bank of Viet Nam decided to fulfill the business community’s expectations, cutting interest rates by 0.25 to 0.5 percentage points, the first such cuts since 2014.

The refinancing, rediscount and overnight electronic inter-bank rates have been reduced by 0.25. The rate for loans taken to offset shortages in clearing between the SBV and commercial banks has been cut by 0.25 percentage points, while the rate for short-term đồng loans offered by credit institutions to some sectors has been adjusted down by 0.5 percentage points.

Even before the rate cuts some banks had dropped their deposit interest rates as if to prepare for a cut in lending interest rates in the near future.

For instance, in late June Dong A Joint Stock Bank reduced its deposit interest rates across the board.

On the interbank market, the overnight, one week and one month interest rates saw a steep fall of 50-80 points.

Market observers said the strong decrease in deposit interest rates by banks at this time is an unusual phenomenon.

Analysts said the main reason for this is their unusually high liquidity now.

One reason for this liquidity is that the SBV bought a considerable quantity of foreign currencies in June after its Transaction Office raised the rate of the US dollar by VNĐ50 to VNĐ22,725 per dollar.

A SBV spokesman revealed that Viet Nam’s foreign exchange reserves were worth US$42 billion by late June, a record level. It was double the figure in 2008.

Another reason for the rate cut is the low inflation, with prices rising by only 1.52 per cent from the same period last year. The central bank possibly felt the need to stimulate the economy or at least felt there is no danger of inflation from low rates.

Most banks admit that the cost of capital in the first half of the year deceased significantly though they refused to amplify.

They were most likely referring to the rather large spread that had developed between the loan and deposit interest rates.

The spread now stands at 2 per cent on average and up to 2.7-2.8 per cent in some cases.

In the event, some analysts said the central bank should have considered a 0.5 percentage point cut to stimulate growth.

At a recent online meeting of the Government, Minister of Finance Dinh Tien Dung said that biggest expense for businesses is their loan interest.

Because the capital market is not highly developed yet, the banking sector remains the most important supplier of funding for the economy. Not surprisingly the country’s debts are worth 110-120 per cent of GDP at VNĐ6 million billion (US$264.4 billion).

Meanwhile, loan interest rates now are 6-9 per cent on long-term loans and 9-11 per cent on short-term loans.

The banking sector is collecting around VNĐ200 trillion (US$8.81 billion) a year from loan interest.

This is higher than the total income tax paid by businesses estimated at VNĐ188 trillion.

Most Vietnamese companies admit they might not be able to survive if the lending interest rates are high.

Analysts said this means that cuts in loan interest rates have a much greater influence on businesses than any cuts in income tax rates.

They are hopeful that the central bank’s interest rate cuts this time would have a significant impact on enterprises’ turnover and profit in the near future.

The decrease in their production costs would result in an increase in trading and production, consumer spending, and ultimately the economy, they said.

VNS