HSBC: Lowering OMO rate may push term rates higher

Monday, Jul 22, 2013 16:10

The State Bank of Viet Nam lowered the OMO rate by 0.5 per cent on July 19. According to HSBC lastest report, it possibly pushes term rates higher. —Photo
HA NOI (Biz Hub) — The lowering of the open market operations (OMO) interest rate by the Sate Bank of Vietnam (SBV) could trigger outflows, further exacerbating the liquidity crunch and possibly pushing term rates higher, according to a report by HSBC Bank.

The central bank cut the OMO rate to 5.5 per cent from six per cent last Friday. The entire OMO offer of VND7 trillion (US$330 million) at 5.5 per cent was absorbed by banks.

HSBC has determined that the move is likely to ease the recent liquidity crunch, which caused overnight interest rates to rise to their highest level this year.

"With inflationary pressure elevated due to a recent gasoline price hike, potential increases in public service costs and the cost pressures caused by the recent VND devaluation, the SBV is unlikely to cut rates further," the report said.

The bank report also showed that lowering the OMO is unlikely to solve the fundamental issues surrounding Viet Nam's meager credit growth.

The opening of the Viet Nam Asset Management Company (VAMC) was delayed on July 9 but HSBC believed that while the VAMC was not expected to be a panacea to Viet Nam's debt issues, its operation is symbolic in signaling the government's commitment towards tackling economic inefficiencies.

HSBC said that the recent VND weakness coupled with accelerated inflation and higher oil costs suggests that headline inflation will likely rise to 7.1 per cent year-over-year in July from 6.7 per cent in June.

Dampened domestic demand and a favorable base effect will likely push inflation lower near the end of the third quarter of 2013, the report also said.

However, HSBC supposed that upside risks to inflation remain and that commodity prices might rise due to an expected acceleration of global growth in the fourth quarter of this year.

"With core inflation in the double-digits and headline inflation expected to accelerate in July, the SBV has limited room to cut rates further. We expect rates to stay steady, if not move higher, from now on," the report said. — VNS

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