Lower USD interest rate does not harm businesses
The US dollar interest rate cut last month will not cause economic losses for organisations or individuals, said the State Bank of Vietnam (SBV) on October 12, adding that it is more beneficial to shift to VND as the difference between the interest rates on USD and VND deposits is now above 5%.
On September 28, the SBV slashed the interest rate ceiling on US dollar deposits offered by commercial banks to organisations and companies from 0.25% to zero percent per year, while the rate for individuals was reduced from 0.75% to 0.25% per year.
The move aimed to prevent foreign currency hoarding in the domestic economy and increase the interest rate gap to create more advantages for the dong against the dollar.
The current interest rate ceiling on dong deposits is 5.5%.
The central bank recommended companies making future payments in USD transfer their USD deposits into VND to eliminate any potential opportunity costs and purchase dollars under a forward contract for the payment.
The forward contract will enable the company to exchange an amount of currency in a specific future date for a specific rate in order to avoid exchange rate risks.
Interest payments from the new dong deposits would both make up for the cost of the forward contract and generate profits for the firms.
Furthermore, local enterprises also benefit from lowered dollar interest rates when taking out loans in USD compared to VND.
The SBV devalued the dong by 1% and expanded the exchange rate trading band in commercial banks from 1% to 3% in August, a move to keep the dong flexible enough to defend against negative fluctuations in both domestic and global markets by early 2016.
It will continue to use a mix of monetary policies to ensure a balance of foreign currency supply and demand and limit speculation on future exchange rates.
The move aimed to prevent foreign currency hoarding in the domestic economy and increase the interest rate gap to create more advantages for the dong against the dollar.
The current interest rate ceiling on dong deposits is 5.5%.
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The central bank recommended companies making future payments in USD transfer their USD deposits into VND to eliminate any potential opportunity costs and purchase dollars under a forward contract for the payment.
The forward contract will enable the company to exchange an amount of currency in a specific future date for a specific rate in order to avoid exchange rate risks.
Interest payments from the new dong deposits would both make up for the cost of the forward contract and generate profits for the firms.
Furthermore, local enterprises also benefit from lowered dollar interest rates when taking out loans in USD compared to VND.
The SBV devalued the dong by 1% and expanded the exchange rate trading band in commercial banks from 1% to 3% in August, a move to keep the dong flexible enough to defend against negative fluctuations in both domestic and global markets by early 2016.
It will continue to use a mix of monetary policies to ensure a balance of foreign currency supply and demand and limit speculation on future exchange rates.