Tag: Interbank interest rates

The USD/VND exchange rate quickly cooled last week after flexible regulatory moves from the State Bank of Vietnam. Interbank interest rates, meanwhile, skyrocketed over the last week. In just one and a half months, the interbank overnight lending rate has increased more than ten times and the one-week term lending rate more than five times.

Interbank interest rates have continued to increase despite the State Bank of Vietnam’s net injection of capital. This appears to put a strain on liquidity in the banking system. In early August, VND85 trillion ($3.64 billion) of bills will mature, which will help system liquidity regain some balance.

Bidding on government bonds is at a low level, although registrations are 1.8-times higher than bids. At the same time, interbank interest rates have remained high. This shows that the pressure to increase interest rates is becoming increasingly clear, especially as the speed of public investment disbursement will gradually rise.

As of March 18, the short-term interbank interest rate had remained above 2 per cent for seven consecutive weeks, and was double the rate at the end of 2021 and up 5-6 times over the same period last year. According to SSI Securities, the main reason for the high interbank interest rate is the recovery of credit, which has cut into bank liquidity.

The credit balance in February was down by VND96 trillion ($4.1 billion) while cash outflows seen before the Lunar New Year (Tet) returned, meaning less stress on liquidity in the banking system. This is most evident in the decline in interbank interest rates.

With abundant liquidity in the system and the continuous addition of VND from foreign currency repurchase contracts, interbank interest rates are expected to not fluctuate to any great extent. In the long term, however, they may be under a degree of upwards pressure, especially at the end of the year.

Amid weak credit demand due to prolonged social distancing measures and abundant sources of VND from mature foreign currency contracts, interbank interest rates are forecast to decrease slightly. The balance of payments improved due to stable domestic foreign currency supply and demand and falls in exchange rates.