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Government bond interest rates pushing market interest rates up   2009-07-22 - LD

The recent unsuccessful Government bond bids were blamed on the fact that the interest rates set by the Ministry of Finance were lower than the market rates. However, experts are saying the contrary.

 

Investors expect interest rates to be higher

 

 
The State Treasury has been assigned to mobilise 126,000 billion dong worth of capital this year. Meanwhile, it only mobilised 12,500 billion dong in the first half of the year. The failure of many Government bond bids recently has been attributed to the ceiling interest rates set by the Ministry of Finance, which were always lower than the market rates.

 

However, some experts have affirmed that the Government bond interest rates have been higher than the market rates. The average interest rates for 24-month term deposits offered by state-owned banks are now at 8 percent per annum, while the rates applied by joint-stock banks 8.8-9 percent per annum. The average rate for 36-month term deposits is 9 percent per annum (the highest rate, applied by HCM City Housing Bank since mid June 2009, is 10.2 percent).

 

Meanwhile, the ceiling interest rates set by the Ministry of Finance for Government bond bids have been raised gradually from 7 percent to 9.3-9.4 percent.

 

The experts say that the failed bond bids should be explained by the fact that the bonds' interest rates still couldn't meet the high expectations of purchasers.

 

Bank interest rates following bond interest rates

 

In principle, Government bonds always have lower interest rates than bank interest rates because of their higher safety. However, a paradox exists that the Government is now having to pay more than commercial banks to borrow money from people. The Government, in an effort to successfully borrow money from the public to serve the demand stimulus package, has accepted increasing the ceiling interest rates.

 

However, this will likely lead to the situation that people will be attracted by the higher Government bond interest rates and purchase bonds instead of making deposits at banks.

 

As a result, commercial banks are expected to raise deposit interest rates further.

 

As the state budget is expected to see a big deficit as many income sources have been cut as a result of the economy, the interest rate increase proves to be unavoidable

 

Experts said that the Ministry of Finance is likely to have to raise the ceiling interest rates in order to ensure the success of Government bond bids. As such, commercial banks will also have to raise deposit interest rates to attract depositors.

 

After a couple of weeks of stabilised interest rates, some commercial banks, Sacombank, Asia Commercial Bank, Phuong Nam Bank and Eximbank, have raised interest rates on both VND and US$ deposits.

 

As deposit interest rates have been increasing, banks will have to provide loans at higher interest rates. This means that the central bank may have to consider raising the basic interest rate to pave the way for a higher ceiling lending interest rate.



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