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November 21, 2008
Vietnam trims dong rates again

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December 18, 2008

Vietnam’s central bank to introduce ceiling, floor rates
Vietnam's central bank will gradually widen the band in which its currency is allowed to trade, and replace the current mechanism by which banks set interest rates with ceiling and floor rates, Reuters quoted a bank official as saying.

The dong is now allowed to trade against the dollar within a 3-percent band around a midpoint rate set daily by the central bank. Widespread expectations the currency will depreciate have brought the interbank market to a near standstill in recent weeks.

"The trading band for foreign exchange transactions will be gradually expanded with state intervention," Pham Huu Phuong, head of the central bank's representative office in Ho Chi Minh City, was quoted on Thursday's Thanh Nien newspaper as saying.

For rates, the State Bank of Vietnam would use the overnight rate and the refinancing rate as the ceiling and the discount rate as the floor, Phuong said.

The central bank now sets a base rate against which banks must calculate their own rates for deposits and lending with a ceiling of 150 percent of the base rate. There is no fixed floor.

The ceiling and floor would be used for interbank market transactions, Phuong told a seminar on Wednesday in the city, Vietnam's commercial centre. He gave no timeframe for the new policy.

The base rate stands at 10 percent after being cut by 400 basis points since late October.

He said the central bank would gradually reduce the ratio of compulsory reserves banks must set aside against their deposits as long as inflation continued to abate.

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