Interest rates down, capital mobilization down
Late in the afternoon of May 23, 2022, the State Bank announced a reduction in operating interest rates. Accordingly, the maximum interest rate applied to non-term deposits and deposits with terms of less than 1 month remains at 0.5%/year; the maximum interest rate applied to deposits with terms from 1 month to less than 6 months is reduced from 5.5%/year to 5.0%/year, while the maximum interest rate for deposits in VND at People's Credit Funds and Microfinance Institutions is reduced from 6.0%/year to 5.5%/year; the interest rate for deposits with terms of 6 months or more is determined by credit institutions based on the supply and demand of capital in the market.
This is the third time this year that the State Bank has reduced its operating interest rate. Previously, this agency had reduced interest rates twice in a row in March 2023, leading to a decrease in deposit interest rates at commercial banks.
The reductions in deposit interest rates are aimed at creating room for reducing lending interest rates to support businesses in overcoming difficulties.
With interest rates falling, saving money will certainly become less attractive. However, choosing an effective investment channel is a difficult problem for money keepers. Illustration photo
According to statistics from the State Bank, by the end of April 2023, the average VND deposit interest rate of domestic commercial banks was at 0.2 - 0.3%/year for demand deposits and deposits with terms of less than 1 month; 5.3 - 5.4%/year for deposits with terms from 1 month to less than 6 months; 7.1 - 8.8%/year for deposits with terms from 6 months to 12 months; 6.8 - 8.0%/year for deposits with terms from over 12 months to 24 months and 7.1 - 8.3%/year for terms over 24 months.
Thanks to the reduction in deposit interest rates, the average lending interest rate of domestic commercial banks for new and old loans with outstanding balances is at 9.6 - 11.2%/year. The average short-term lending interest rate in VND for priority sectors is about 4.4%/year, lower than the maximum short-term lending interest rate as prescribed by the State Bank.
Lower interest rates create a premise to support businesses, but on the contrary, bank deposits become less attractive.
According to data from the General Statistics Office, in the first quarter of 2023, capital mobilization of credit institutions increased by 0.77%, much lower than the figure of 2.15% in the first quarter of 2022.
Which investment channel will be effective?
Currently, there are 3 main investment channels “competing” with bank deposits. They are gold, foreign currency and real estate. However, foreign currency and real estate are clearly “weak”.
Regarding foreign currency, sharing at the 2023 Banking Panorama Forum, held in Hanoi on May 10, 2023, Dr. Can Van Luc - Chief Economist of BIDV, member of the National Financial and Monetary Policy Advisory Council, predicted that the US Federal Reserve (FED) will no longer raise interest rates this year after 10 rapid interest rate hikes to record levels since 2007; and will reverse interest rates from the beginning of 2024.
Therefore, according to Dr. Can Van Luc, fluctuations in the USD/VND exchange rate above 3% are acceptable. Since the beginning of the year, VND has appreciated by 0.7% - 0.8% compared to USD. Dr. Can Van Luc predicts that the basic exchange rate for the whole year of 2023 will be stable, if VND depreciates, it will only be about 0.5 - 1%.
With such low returns, it is clear that the greenback is not an effective destination.
Meanwhile, many people believe that the real estate market will benefit from lower interest rates. However, according to Mr. Nguyen Van Dinh, Vice President of the Vietnam Real Estate Association - President of the Vietnam Real Estate Brokers Association, interest rates for home loans have decreased but not significantly, still fluctuating around 13%/year. Mr. Dinh said that this interest rate should be below 10%/year to be appropriate.
In the real estate market, the barrier lies not only in high interest rates but also in the difficulty in accessing loans.
Among investment channels, gold seems to be the most optimistic. Currently, gold has decreased significantly after conquering the all-time high (2,085.4 USD/ounce) on May 5, 2023.
On the morning of May 24 in the Asian market, the world gold price was trading at 1,973.9 USD/ounce, down about 111.5 USD/ounce, equivalent to 5.3% compared to the all-time high. Therefore, this precious metal has a lot of room to break out, especially in the context of the debt ceiling that could cause the US to default.
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