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Why dollar interest rates keep rising?   2011-01-24 - Thoi bao Kinh te Vietnam

Dollar deposit interest rates keep increasing. Banks raise their offered interest rates regularly to retain depositors and attract new clients. However, no one knows why the dollar interest rates keep rising.


In late 2010, the Asia Commercial Bank (ACB) announced their new slight increase interest rates for dollar deposits. Seven days later, Eximbank raised their interest rates (its highest interest rate is 5.2 percent per annum). Vietcombank, a bank which usually keeps deposit interest rates low because they have many different capital sources, also followed the crowd and raised their deposit interest rate to five percent at maximum.


More importantly, all the above said banks are big banks which have profuse capital.


Analysts say that the slight increases of dollar deposit interest rates have not had big impacts on the market, because the “big guys” still keep their interest rates at no more than five percent per annum.

However, the market is still heating up in some places. VietBank, for example, has raised their deposit interest rate to six percent per annum, and Navibank, to 6.24 percent.


In principle, when the demand for capital increases, commercial banks have to raise deposit interest rates in order to attract more capital. If this happens, this would not be surprising to people who witnessed the foreign currency credit boom in 2010 (the foreign currency outstanding loans increased sharply by 37.7 percent). People think that the tendency will continue in 2011, especially when the gap between the Vietnam dong and dollar interest rates is very big.


However, it is quite strange that when asked about the reasons behind the dollar interest rate escalation, a manager of a commercial bank also said that he himself is trying to seek to understand the reasons. He himself cannot understand why the interest rates are increasing when the demand for foreign currency loans and the disbursement of the bank have not seen any major changes.


Meanwhile, another banker, who raised interest rates, said that it is simply because some banks need dollars to meet the demand of some enterprises and they decided to raise interest rates in order to arrange enough money. And once some banks adjust their interest rates, other banks also have to follow the move, because they fear that they will lose depositors to other banks that offer higher interest rates.


According to Thoi bao Kinh te Vietnam, there is another supposition that explains why banks are raising interest rates.


In mid December 2010, responding to the call from the State Bank of Vietnam commercial banks, had to commit to keep interest rates at 14 percent per annum at maximum. Banks have also been required not to use gifts and promotion campaigns in order to push the actual interest rates up.


Since all banks now mobilize capital at the same ceiling interest rate of 14 percent, small banks will find it more difficult that bigger banks to mobilize capital. Therefore, in order to get enough capital, small banks have thought of seeking capital in foreign currencies, and then converting the foreign currency capital to Vietnam dong to lend to clients.


This is just a supposition. However, the supposition appears to be very reasonable. That also can explain why the banks that sharply raised the dollar interest rates are the small banks which once faced problems in liquidity and had to offer very high interest rates in Vietnam dong.


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