Will Vietnam's monetary policy reverse soon?

In line with global trends, Vietnam's monetary policy was reversed early to preemptively loosen and promote the economy's speedy recovery following the epidemic.

Global Reversal Trend

The European Central Bank (ECB) lowered interest rates in early June, lowering the benchmark rate from 4.5% to 4.25% (a 25 basis point drop). This was the first rate cut since September 2019. Following this, the Danish Central Bank lowered interest rates by 25 basis points to 3.35%. Previously, on June 5th, the Bank of Canada (BoC) decreased its interest rate by 0.25%, the first rate drop since March 2020.

Since the start of the year, numerous nations have enacted monetary easing. On February 8th, Sweden became the first of the world's 10 most traded currencies to lower interest rates. In March, the Swiss National Bank likewise reduced interest rates.

Mr. Hoàn stated that following persistent monetary tightening to battle inflation and huge capital injections to rescue countries during the epidemic, these rate reductions reaffirm the need for measures to encourage economic recovery and guarantee that inflation has cooled to target levels.

Currently, the Federal Reserve (FED) maintains high interest rates of 5.25-5.5% and forecasts only one rate decrease by the end of the year, although a shift in the FED's policy is likely.

However, for the United States, this is a more difficult situation because of the fear of inflation. Furthermore, when major central banks cut interest rates while the FED maintains high rates, the interest rate disparity may attract investment flows, raising liquidity and making the FED's price control operations more difficult to manage.

Vietnam's Choice

According to Mr. Hoàn, Vietnam may not follow the global trend of reversing monetary policy, as it has its own time.

First, in terms of inflation pressure, Vietnam is not immune to variables that might influence inflation, such as rising commodity prices, notably skyrocketing transportation costs. However, with global oil prices expected to remain stable in 2024, the risk of higher transportation costs as a result of Chinese exporters cramming supply ships is only temporary.

Domestically, most analysts believe inflation will remain under control until the end of the year. According to a State Bank of Vietnam (SBV) study published in May 2024, experts estimate average inflation to be 3.85% in 2024 compared to 2023, 3.60% in 2025 compared to 2024, and 3.55% in 2026. All are low and below the National Assembly's expectations for this year, allowing SBV to maintain constant policy rates.

Second, since early June, the SBV has demonstrated its efficacy in intervening in the gold market and stabilizing exchange rates. Assuming an increase in foreign currency demand at the end of the year, but with favorable conditions from the USD depreciation in the international market (when the FED cuts rates), exchange rate pressures may no longer be a problem for the SBV.

The SBV may have challenges meeting its credit growth target of 14-15% while maintaining steady policy rates, as many commercial banks have raised deposit rates.

Is the increase in commercial banks' deposit rates indicative of a "market ahead of policy"? Mr. Hoàn does not think so! Because commercial banks normally raise interest rates within specific ranges, with no competition to go over the cap, even for deposit products like certificates of deposit offered by small-scale commercial banks.

Of course, if the policy rate cap is not relaxed, deposit rates cannot continue to grow in one direction while lending rates do not rise in response. However, from now until the end of 2024, in order to encourage growth and satisfy the National Assembly's aims, the "impact point" of policy adjustments may not occur unless the expected deposit rate increase is within 50-100 basis points, considerably surpassing forecasts.

Rising interest rates may raise anxiety among companies. However, aggregate polls show that as long as there is significant market demand, absorbing money at a higher cost is still preferable to borrowing at a lower cost without knowing what to do with it.