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May 18, 2008

Central bank scraps dong deposit rate cap

Vietnam's central bank said on Saturday it has abolished the 12-percent ceiling rate on dong deposits and allowed banks to set their own rates from next week to help increase liquidity, reported Reuters.

The State Bank of Vietnam, the country's central bank, said it introduced a base rate at 12 percent to be applied for both deposits and lending as from May 19, from a base rate of 8.75 percent now applied only for dong loans.

As of next Monday banks can fix on their own the rates on dong deposits and lending, provided their rates would not be 150 percent above a base rate announced monthly by the central bank, it said in a statement seen by Reuters.

"With a base rate of 12 percent per year, the maximum lending by banks will be 18 percent, relatively suitable with the level of market rates and which would not cause major changes on the credit and money markets," the statement said.

Banks have now been offering lending rates of between 15-18 percent per year, the central bank said.

In February the central bank capped the dong deposit rate at 12 percent after banks sparked a heated competition to secure dong funds by offering rates of nearly 14 percent, prompting a shift in deposits from banks with lower rates.

Banks competed in securing funds because a week-long holiday in early February boosted demand for cash while the central bank was tightening monetary policy to offset double-digit inflation.

In March banks agreed to cut the cap on dong deposit rate to 11 percent as they had raised sufficient funds, but the decision lasted only about a month until late April when fund shortages re-emerged so commercial banks re-installed the 12 percent cap.

Since the start of May dong fund shortages have been worsening and major lenders raised their overnight dong loans on the interbank markets to 9-11 early this week from 5-10 percent in late April VNIBOR.

The central bank has said that apart from injecting cash via open market operations, it would step up lending, especially to smaller banks, to help boost their liquidity.

The central bank's statement on Saturday said it will raise the refinancing rate on loans to commercial banks to 13 percent as from Monday, from 7.5 percent now and its discount rate will also be increased to 11 percent, from 6 percent at present.

"This mechanism creates a corridor between the refinancing rate and the discount rate with a spread of 2 percent which will help regulate the interbank market rates," the statement said.

The central bank also pledged to further change its interest rates based on market changes.

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