e annual rates they pay on dong deposits to around 15.5-16.5 percent from 17-18 percent.
On Tuesday the central bank cut its base rate to 13 percent from 14 percent.
It also cut the refinancing rate at which it lends to commercial banks to 14 percent from 15 percent and the discount rate to 12 percent from 13 percent.
It also doubled the interest rate it pays on banks' required dong deposits kept at the central bank to 10 percent.
Vietnam has already cut its annual growth target this year to 6.5-7 percent from an earlier target of as high as 9 percent.
Earlier in the year the central bank had raised its base rate three times to contain inflation, which approached an annual rate of 30 percent before slipping slightly to an estimated 27.9 percent in September from 28.3 percent in August.
It is expected that in 2009, lending interest rates will be negotiated by banks and clients. Currently, with the ceiling interest rate scheme, the interest rates applied to different clients are nearly the same.
Prime Minister Nguyen Tan Dung, in his speech at the fourth session of the 12th National Assembly, said that the government will guide the implementation of the negotiation-based interest rate scheme in accordance with the National Assembly?s resolution.
A source said that in the near future, Vietnam will have a ?market interest rate? scheme, while the basic interest rate, announced by the State Bank of Vietnam, will only serve as the orientation for the market.
Experts have pointed out that the ceiling interest rate scheme applied since June 2008 has helped force lending interest rates to decrease sharply. However, they say that if the scheme is applied for too long, capital will not be able to go the ones who really have a demand.
The Deputy General Director of a joint-stock bank said that his bank has stopped providing consumer credit for individuals because of the interest rate policy. The problem lies in the fact that banks cannot lend to clients at interest rates higher than the ceiling rate in order to cover risks of risky credit products.
He said that the lending interest rate for consumer credit should be as high as 24% to cover risks, while banks now can lend at 16.5% per annum at maximum.
The ceiling interest rate scheme has also made it more difficult for banks to offer capital to individuals, small- and medium-size enterprises, and households in rural areas. No bank mobilises capital in urban areas to send to rural areas to lend at interest rates not high enough to cover risks and management expenses.
A banker said that only when lending interest rates in rural areas are 20-30% higher than the normal rates in some cases will banks send capital there.
Some people are concerned that a negotiation-based interest rate scheme, if allowed, would pave the way for the development of usury. However, experts affirm that usury would only occur if a monopoly existed. Meanwhile, currently, with many banks operational, the fierce competition among banks will prevent banks from lending at high interest rates.
Bankers have urged the State Bank of Vietnam to implement the negotiation-based interest rate scheme, saying that this would help the central bank manage the monetary policies better. Negotiated interest rates can truly reflect the demand and supply of capital on the market, which can help officials make suitable decisions to regulate the monetary market.
Le Duc Thuy, former Governor of the State Bank of Vietnam, now Chairman of the National Council for Financial Supervision, also said that negotiation-based interest rates would clearly show the true state of the market and thus help effectively allocate financial resources in the national economy.