Do higher interest rates affect the stability of prices?

Rising interest rates not only affects businesses’ ability to borrow capital but also causes snags in controlling prices, especially during the traditional Lunar New Year festival (Tet).

Difficulties facing businesses

In recent times, the capital market has become “overheated” when interbank deposit and credit rates suddenly rose again following the recent price fever for gold and US dollars.

Some commercial banks’ credit rates hit a record high of 19 percent per year, causing a number of difficulties for businesses when trying to access loans to expand production.

Vu Tri Dung, director of the Long Thanh Company, which trades in timber for industry, says that his company finds it difficult to borrow capital because banks prioritise long-standing clients.

Some banks temporarily provide loans to businesses because of their limited capital and credit.

This year businesses have faced high exchange rates as the US dollar on free market recently hit VND21,500.

Dung says the rising value of the US dollar and high interest rates leads to a sharp increase in prices and a fall in businesses’ profit.

To maintain production, the company has had to cut down other costs to step up sales efforts, says Dung. However, if the company failed to turn over quickly it would suffer ever greater losses.

Nguyen Hien Vu, Director of the Logistic Services Company, which specialises in imports and exports and has many foreign partners, says that his company needs more cash to pay its foreign partners while the US dollar keeps appreciating.

On the other hand, it is very difficult to buy US dollars from banks. Therefore, businesses have to try their best to cut down on unnecessary costs and wait until bank rates and exchange rate are stable to expand production.

Vu says that to help businesses access loans, the State Bank of Vietnam (SBV) must control the exchange rate. Currently, US dollar on free market cost nearly VND22,000 while bank rates are too high. Vu admits that businesses can only afford loan rates of around 15 percent per year.

Lower interest rate to stabilise prices

According to the SBV’s figures, the banks’ growth rate of credit had increased by 22 percent by the end of November, compared to late 2009, while line of credit (LOC) for 2010 is 25 percent. Therefore, in the remaining months of this year, the LOC will be restricted and high interest rates will prevent businesses from borrowing loans.

In recent days, many banks broke an agreement to provide capital at 12 percent per year but raised it to 13-14.5 and even 18 percent. Despite the high rates, some banks could not raise enough capital, causing more difficult for businesses.

Cao Sy Kiem, President of the Small-and Medium-Sized Enterprises Association, says that while foreign businesses mainly use their own capital and borrow a little from banks, domestic businesses mainly depend on bank loans.

Domestic businesses find it difficult to borrow capital from banks at the current high rate and their production has dropped. Many businesses have also missed opportunities to make their products more competitive on the market.

The SBV aims to raise its interest rates to keep exchange rates stable and reduce inflation. However, it cannot maintain the high rates for long as this will affect medium and long-term projects and make products scarce in the future, especially during Tet.

Keeping loan rates at 15-16 percent is reasonable as higher rates will make businesses raise their product prices and hinder efforts to stabilise macroeconomy, maintain economic growth and contain inflation.

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