Vietnam’s monetary policy will remain accommodative

Private banks' rates for 3-month and 12-month term deposits increased by 27 basis points and 26 basis points, respectively. Photo: Transactions at TPBank.

>> The pressure to increase deposit interest rates will happen at the end of the year

The Federal Open Market Committee (FOMC) decided to raise the Fed funds rate by 75 basis points to a target range between 2.25 percent and 2.5 percent during its meeting on July 26–27, 2022. According to CME Group data, traders assigned a probability of around 53% that the central bank will boost rates by 0.75 percentage points, or 75 basis points, for the third consecutive month in September.

Officials from the FED also decided to start reducing their balance sheet in June 2022, initially by US$47.5 billion per month ($30 billion in US Treasuries and $17.5 billion in MBS), and then by US$95 billion per month ($60 billion in US Treasuries and US$35 billion in MBS) after three months. According to the proposed scenario, the FED's balance sheet might be reduced by $427.5 billion in the second half of 2022. As a result of this scale's tiny size (it represents only 5% of the size of the current Fed's balance sheet), the effect on the liquidity of the world's financial markets will be minimal.

However, Mr. Dinh Quang Hinh, an analyst at VNDirect, said the SBV would maintain a "appropriate" monetary policy rather than be in a rush to tighten policy right away to promote economic recovery and market stability for a variety of reasons.

First, the consumer price index (CPI) for the first half of 2022 stayed at 2.4 percent yoy, which is still well below the government's objective of 4 percent yoy, even if inflationary pressures are predicted to worsen in the upcoming months.

Second, maintaining low lending rates is still a top priority for the SBV in order to support businesses and the recovery of the economy. Only in 4Q22 will there be any monetary tightening, and only modest rate increases of 0.25 to 0.5 percent will be made.

The SBV estimates that by June 30, 2022, the Vietnamese economy's credit growth will have surpassed VND11.4 million billion, up 9.35 percent year over year (that in the same period last year increased by 6.47 percent yoy). The loan growth in Vietnam is expected to be significant in 2022F, at 14% year over year, according to VNDirect. It anticipates that starting at the end of 3Q22, the SBV will increase the "quota" on credit growth for several commercial banks.

Credit flows for manufacturing and services would be given priority, particularly in priority businesses like industry, export-import activity, agribusiness, forestry, and fishery sector. Additionally, Mr. Dinh Quang Hinh stated that the SBV would carefully monitor credit flows into high-risk industries like real estate, securities, and BOT (Build-Operate-Transfer) projects.

>> Banks continue savings interest rates “race”

Meanwhile, State-owned banks' 3-month term deposit rates were constant as of July 1, 2022, compared to where they were at the end of 2021, but the rates for 12-month term deposits increased by 4 basis points. Regarding private banks, the rates for 3-month and 12-month term deposits increased by 27 basis points and 26 basis points, respectively, in comparison to where they were at the end of 2021.

"We anticipate a 30–50 basis point increase in deposit rates in 2H22F. The 12-month deposit rates of commercial banks, which are currently at 5.7 percent per year, are expected to increase to 6.0-6.2 percent per year by the end of 2022. However, this is still below the pre-pandemic level of 7.0 percent per year, said Mr. Dinh Quang Hinh.

With regard to lending interest rates, the SBV is putting into effect an interest rate compensation package with a scale of VND 3,000 billion. For companies that have been severely impacted by the COVID-19 pandemic, it offers credit rates of about 3–4 percent annually. Additionally, the Government intends to increase the amount of the interest rate compensation package for businesses to VND40,000 billion, concentrating on a number of priority businesses, such as (1) small and medium-sized enterprises, (2) businesses taking part in a number of important national projects, and (3) businesses in specific industries (tourism, aviation, transportation).

Mr. Dinh Quang Hinh anticipated that the interest compensation package will contribute to a reduction in loan rates of 20–40 basis points in 2022F, on average. However, if commercial banks raise lending rates on other traditional loans to counteract the rise in deposit rates, the actual impact of the interest rate compensation package on businesses and the economy might be lessened.