Assessing the Determinants of Interest Rate Transmission in Vietnam

This paper estimates the magnitude and speed of the interest rate pass-through and assesses the determinants of interest rate transmission in Vietnam for period 2006–2017. The finding shows that the interest rate pass-through from policy rate to interbank rate and from interbank rate to market rates are not perfect. Particularly, the effect of interbank rate on deposit and lending rates is weak, not as high as SBV’s expectation. The speed of interest rate adjustment is relatively slow. Normally, it takes around one month for interest rate to adjust to the long-term equilibrium. The primary causes of limitations come from different factors, such as the degree of financial dollarization, lack of exchange rate flexibility, low liquidity and asset quality ratios of the banking system, the concentration and underdevelopment of the financial system, poor legal system quality, government budget deficit, the poor independence of the State Bank of Vietnam-SBV (Central Bank of Vietnam) and the overwhelming dominance of the fiscal policy.