Balancing interest rates and exchange rates

The USD index is currently at 106 points, 7% below the 20-year top.

>> Policy rate hike unavoidable to curb exchange rate, inflation risks

The relationship between the currency rate and interest rates has improved significantly, especially in light of the possibility that the FED will scale back future rate hikes.

Lower pressure on the exchange rate

Experts anticipate the FED to only hike rates by 50 percentage points at the next meeting in December and then may continue to limit  the rate hike to 25 percentage points as the U.S. CPI continues to decline, falling to 7.7% in October. The USD fell again as a result of this assumption. The USD index is currently at 106 points, 7% below the 20-year top.

Experts claim that the downward trend in the USD has reduced pressure on the USD/VND rate. According to Dr. Can Van Luc, a financial analyst, the upward pressure on the USD/VND rate will ease, and the devaluation of the VND versus the USD in 2023 is projected to be considerably softer than this year.

Additionally, the significant trade surplus, rise in FDI disbursement, robust remittances, etc. all helped to cool down the USD/VND rate.

Notably, the SBV also decreased the selling price of the USD for the first time following six hikes, and the central exchange rate has also been steadily depreciating recently.

>> Hedging against exchange rate risk

Relieve interest rate pressure

The SBV twice raised policy rates and ceiling interest rates for short-term deposits and loans in an effort to curb inflation and ease pressure on the currency rate. Not to mention the SBV's sale of foreign currency, which attracts a lot of dongs and raises the interest rate on those dongs while also helping to stabilize the exchange rate.

According to Dr. Can Van Luc, interest rates in Vietnam have risen recently and very swiftly. However, in the foreseeable future, interest rates cannot and should not rise quickly and significantly. If not, firms won't be able to survive, hindering the economic recovery.

In recent times, the SBV has also consistently increased market liquidity to lessen the impact of rate hikes. Statistics show that between the latter two weeks of October 2022 and the first two weeks of November 2022, the SBV injected up to 123,058 billion dongs into the market.

The SBV needs to balance interest rates and currency rates effectively. In light of this, Dr. Can Van Luc advises prioritizing exchange rate flexibility and attempting to avoid raising interest rates; if they do, the increase will only be marginal.