Keeping the exchange rate stable to control inflation and lower interest rates

Dr. Nguyen Duc Do

What do you think about the impact of exchange rate movements on inflation in 2023?

Inflation pressure in Vietnam in 2023 will not be too great. Specifically, due to the steady increase in core inflationary pressure from mid-2022, the State Bank (SBV) has proactively implemented a prudent monetary policy in the second half of 2022.

According to data from the General Statistics Office, the money supply did not increase in the second half of 2022, and at the same time, the interest rate level in 2022 has increased by about 2-2.5 percentage points compared to 2021. These will be influential factors to curb inflation in 2023.

In particular, the pressure on the exchange rate has also decreased significantly since the end of 2022. In the international market, it is likely that the USD index has peaked in September 2022 and is in a downtrend, although there will be periods of recovery in 2023. In the domestic market, the USD price has also dropped sharply since December 2022. From the end of 2021 to the end of 2022, VND only depreciated about 3.7% compared to the USD. This is a slight devaluation and therefore will not have a strong influence on inflation.

If the downtrend of the USD continues, the USD/VND exchange rate in 2023 will be kept stable by the SBV to control inflation and lower interest rates to support economic growth. Thus, the pressure on inflation from variables such as currency, exchange rate or the price of fuel and raw materials is likely to have peaked in 2022 and will decrease in 2023.

How will the stable domestic foreign exchange rate affect the macro economy, sir?

Obviously, keeping the exchange rate stable will reduce people's incentive to hoard foreign currency, the amount of foreign currency sold will decrease, creating conditions for the State Bank to buy in for reserves, helping to increase the money supply, thereby reducing pressure to increase interest rates. Moreover, the increase in inflation is less affected, which will help prices and the domestic market to be stable, the cost of raw materials and production accessories will fluctuate slightly, creating conditions for businesses and the economy to recover and develop.

In particular, foreign exchange rate movements often have a strong impact on import and export activities. Vietnam's economic growth model has so far relied heavily on capital and export markets. Once the world economy has strong fluctuations, Vietnam's economy also fluctuates. But as in 2022, the USD Index has increased quite strongly, and the VND/USD exchange rate has also increased by 3-4%, but Vietnam's import and export situation since the beginning of the year has been good, still maintaining a trade surplus although many currencies in the world depreciated sharply.

This shows that Vietnam's import and export turnover does not depend on the exchange rate but depends more on the aggregate demand from the world economy.

Therefore, the development of import and export markets, promotion of business capacity improvement and product and goods quality are essential to maintain sustainable import and export activities.

With the above issues, in your opinion, what should be considered on exchange rate management?

Vietnam is a highly open economy in terms of trade, but the level of financial openness is still low. This is a condition for Vietnam to control both interest and exchange rates to some extent without floating like some other countries. Moreover, the pressure on inflation decreases the room for the SBV to loosen monetary policy to support the economy.

However, Vietnam has many advantages to stabilize the exchange rate, such as high trade surplus, large foreign exchange reserves and remittances, foreign direct investment (FDI) disbursement are positive.

The monetary and financial management agencies have stabilized the macroeconomy, and at the same time taken measures to support the economy, helping people and businesses reduce financial costs while maintaining access to capital in difficult times.

In order to maintain financial and monetary stability, besides being proactive, flexible as well as ready to intervene, it is equally important that the management agency's maintain consistency towards the goal of macro stability.

Thank you Sir!