The adjustment of the interest rate caps on U.S. dollar deposits by companies and individuals earlier this week by the State Bank of Vietnam (SBV) has been lauded by experts as a necessary move to curb the dollarization of the national economy.

The SBV, the country’s central bank, scrapped the interest ceiling on corporate dollar deposits and cut the cap on dollar savings by individuals to 0.25 percent from 0.75 percent, according to a directive that took effect Monday.

Local banks have immediately revised their deposit interest for individual customers to 0.25 percent on Monday, widening the disparity between the rates for Vietnamese dong and U.S. dollar deposits.

For instance, depositors can now enjoy a 4.4 percent a year interest rate for VND savings of one-month terms, whereas the rate is only 0.25 percent a year if they deposit in U.S. dollars.

Local depositors say they will consider switching to savings in the domestic currency, which is likely what the central bank wanted to see when it decided to slash the ceiling rate for individual dollar deposits.

The SBV move is necessary to stabilize the VND-USD exchange rate, prevent the dollarization of the Vietnamese economy, and strengthen the dong, according to experts.

The adjustment of the interest ceilings on dollar deposits came at a time when many Vietnamese are holding the greenback in the hope of more exchange rate increases to come in the last three months of the year.

Vietnam last month devalued the dong by one percent for the third time this year and widened the trading band for VND-USD transactions from one percent to three percent, a move the SBV made to cope with the devaluation of the Chinese yuan.

All this technically caused the Vietnamese dong to lose five percent of its value.

With savings in VND becoming more attractive than in U.S. dollars, depositors will switch to holding the dong, which helps stabilize the VND-USD exchange rate and ‘de-dollarize’ the economy, according to pundits.

“It also paves the way for the central bank to cut interest rates for VND deposits in the coming time,” Dr. Tran Hoang Ngan, head of the Ho Chi Minh City University of Finance and Marketing, said.

  The developments of interest rates for dollar deposits in the last five years. (Unit: percent per year)

The SBV is tasked by the central government with increasing the strength of the dong and prevent the hoarding of foreign currencies, according to deputy governor Nguyen Thi Hong.

“The adjustment of the ceiling rates will thus help achieve such goals,” she told Tuoi Tre (Youth) newspaper.

Local analysts said this is only the initial step and the central bank is likely to enact more strong measures to continue such efforts.

Once VND deposits are still more attractive than dollar savings and the VND-USD exchange rate remains stable, Vietnamese people will automatically stop holding and hoarding the foreign currency, according to experts.

The SBV has indeed successfully discouraged locals from keeping gold with similar measures.

Vietnamese gold holders used to be able to enjoy interest of up to four percent a year for gold deposits, but the rate was gradually cut to zero percent, as the central bank sought to eliminate the precious metal from the banking system due to its highly volatile prices.

Banks in Vietnam are now not allowed to accept gold savings and holders even have to pay fees if they want the lenders to keep the precious metal for them.

The fluctuation of gold prices thus no longer affects the economy and the central bank is hoping to do so in the case of the U.S. dollar.

Like us on Facebook or follow us on Twitter to get the latest news about Vietnam!