Will the SBV raise policy rates in 3Q24?

Rising Price Pressures

As of late June 2024, inflation remained high. Specifically, headline inflation was 4.34% in June (up from 4.44% in May), with prices up 0.17% month on month. Transport inflation declined to 3% (from 5.6% in May) as gas costs fell, although this was offset by rises in other areas. Food inflation increased to 4.7% (from 4.5% in May) as hog prices soared. Housing and building materials inflation rose to 5.6% (from 5.3% in May), with prices rising by 0.35% month on month owing to higher power and water expenses. Healthcare inflation increased to 8% (from 7.4% in May), owing mostly to administrative price hikes in several municipalities. Cultural, entertainment, and tourist costs increased (2.3% vs. 2% in May) due to higher trip package prices in June.

As a result, Maybank Group analysts Brian Lee Shun Rong and Chua Hak Bin retain a 3.7% inflation projection for Vietnam in 2024. Price pressures (in the form of month-on-month inflation) may increase in the coming months as the VND depreciates. The International Monetary Fund (IMF) stated that if exchange rate pressures persist, domestic inflation may be hit more severely.

Furthermore, the General Statistics Office (GSO) stated that the 30% rise for public officers' basic salaries beginning July 1, 2024, may enhance inflation as firms raise prices in anticipation of increased buying power.

The GSO announced that it will regularly monitor consumer pricing and change rates for power, healthcare, and education services to reduce inflationary pressures.

Potential to Increase Policy Rates

In the baseline scenario, Maybank analysts anticipate the SBV to raise the policy rate by 50 basis points in Q3 2024. So far, the SBV has maintained its policy rate after lowering it by 125 basis points in 2023. Exchange rate pressures remain considerable, with the VND weakening considerably since late June, and the SBV has sold USD 5.5 billion from its total foreign reserves of USD 102 billion to date.

Ultimately, the SBV may need to raise policy rates to curb pressures on foreign exchange reserves and address persistently high inflation. Furthermore, the economy is recovering solidly, reducing the need for monetary policy support.

Raising GDP Growth Forecast for 2024 to 6.4%

Brian Lee Shun Rong and Chua Hak Bin have raised their GDP growth forecast for 2024 to 6.4%, from the previous 5.8%. Demand from overseas markets is expected to remain strong in the second half of 2024, supporting manufacturing and trade-related services such as transportation and warehousing.

Foreign investment inflows are boosting production capacity, allowing Vietnam to capture a larger market share during the global demand recovery.

Household consumption is expected to improve in the second half of 2024. Although consumer demand has not yet fully picked up, household confidence may become more optimistic as the economy accelerates and supportive policies are maintained (such as the continued reduction of the VAT by 2% until December 2024).

Additionally, the labor market is gradually improving, with job numbers increasing (196,000 year-on-year in Q2; 0.4%) and incomes rising by 7%. The unemployment rate rose slightly (2.29% vs. 2.24% in Q1) due to an increase in labor market participation.