How does the Fed's interest rate cut affect Vietnam?

Exchange rate pressure will decrease after the Fed's decision to lower interest rates. Photo: Internet

Mr. Suan Teck Kin, Head of Global Markets and Economics Research, UOB Bank, commented that the Fed's decision was a surprise compared to UOB's forecast of a 25 basis point rate cut scenario in the context of a relatively stable economy and cooling inflation.

Mr. Suan Teck Kin also expected the Fed to continue the rate cut cycle in the remaining meetings of 2024, with a total cut of 50 basis points and a further 100 basis points in 2025.

Assessing the impact of this rate cut on Vietnam, Mr. Suan Teck Kin said that despite the impact of the recent storm and the significant recovery of the VND exchange rate since July, he still expected the State Bank of Vietnam to maintain the key policy interest rate for the rest of 2024, as the State Bank kept an eye on inflation risks.

Since the beginning year to August, The headline CPI rose 4%, just short of the 4.5% target. Inflationary pressures could intensify following disruptions to agricultural output, as food accounts for 34% of the CPI.

The State Bank of Vietnam is likely to adopt a more targeted approach to support affected individuals and businesses, rather than deploying a broad-based tool such as a rate cut across the country. As such, the UOB expert expects the State Bank of Vietnam to maintain the refinancing rate at the current 4.5% while focusing on facilitating credit growth and other support measures.

However, the 50 basis point rate cut announced by the US Federal Reserve at its September meeting could increase the likelihood (and pressure) for the State Bank to consider a similar policy easing.

Meanwhile, VinaCapital Fund Management Company believes that the Fed's decision is a double-edged sword for the Vietnamese economy, because in addition to reducing pressure on the exchange rate, the slowing US economy will affect Vietnam's GDP growth.

VinaCapital is concerned about the implications of the interest rate cut for the state of the US economy. Specifically, exports in general and exports to the US in particular (up nearly 30% in the first eight months of 2024) are the most important factor driving Vietnam's GDP growth this year. Therefore, the slowing US economy is likely to reduce US consumer demand for "Made in Vietnam" products such as laptops, mobile phones and other goods.

Therefore, Vietnam's GDP growth in 2025 will have to rely on internal factors to offset the impact of the slowing US economy. Fortunately, the government has many tools that can be used to boost the economy, such as increasing infrastructure spending and promoting the recovery of the real estate sector.

According to VinaCapital sources, it is possible that real estate transaction volume in Vietnam will increase by up to 35% compared to the same period last year in the first nine months of 2024. Focusing on these two areas will directly boost the economy, and a more vibrant real estate market will certainly improve consumer sentiment and spending, which has been somewhat sluggish in 2024.

Dragon Capital Fund Management Company, on the other hand, believes that the Fed's interest rate cut shows confidence in the downward trend of inflation as well as the goal of supporting the economy, and concerns about the possibility of a recession in the US economy should not be the top concern.

Dragon Capital also commented that the Fed's interest rate cut creates the premise for more stable deposit and lending interest rates in Vietnam, contributing to promoting public investment disbursement and credit growth for businesses, supporting the Government's growth target.

Regarding the impact on asset classes, Dragon Capital experts said that investment channels such as stocks will benefit greatly from this move. Because input interest rates for businesses remain low, companies will have good conditions to cut financial costs, expand business and thereby increase profits. This will have a positive impact on corporate value, promoting the growth of the stock market.