Vietnam’s interest rate stays at a high level after rate falls

22-Sep-2020 Intellasia | Tri Thuc Tre | 6:02 AM Print This Post

Although the State Bank of Vietnam (SBV) cut its policy rates twice this year, in March and May to 4.5%, overall, Vietnam’s interest rates were still high in the region, even compared to economies in the Philippines, Indonesia, or India.

Many individuals and organisations had recommended SBV to lower policy rates further in the context of still high domestic interest rates. Also, many countries were continuing to loosen monetary policy and even quantitative easing ( central banks directly bought government bonds) since the beginning of this year.

In fact, it was not possible to simply look at the interest rate differential with other economies to call for lowering interest rates in Vietnam. Because whether the interest rate could be reduced or not and how much it would be cut depended first on the inflation rate of Vietnam compared to the region and the world.

While the general trend in the epidemic outbreak was inflation tending to drop sharply, even as it dropped to below zero, in some countries such as Vietnam and India, inflation remained anchored at significantly above three percent per year in recent months.

It was worth noting that there had been a clear link between inflation and interest rates. With low inflation, even negative ones like Singapore, Malaysia, and Thailand, their interest rates also fell to very low levels.

Indonesia was one of the exceptions. Although their inflation had been relatively low in recent months, interest rates had not been cut after that and slowed down at four percent since the last adjustment in July this year. This was because the country’s central bank was concerned that further cuts in policy rates would further undermine its currency, which had dropped by one percent in value against the US dollar, becoming a fruitful currency with the worst rate in the region in August. Therefore, they decided to keep interest rates unchanged after two policy meetings this month.

Thus, it could be seen that the exchange rate was also one of the other important parameters to decide whether to cut interest rates or not. Regarding Vietnam, it was hard to deny that moderately reducing interest rates was a factor, besides the direct intervention in the exchange rate by buying the US dollar of SBV, helping to maintain the stability of the USD/VND exchange rate during the past time.

The exchange rate stability might be a priority policy of SBV in recent years. This stability could be seen as a successful indicator of the SBV’s monetary and exchange rate policy management. In the context that the US accused Vietnam of manipulating the currency, SBV had more reasons not to loosen monetary policy or further cut interest rates to weaken the exchange rate. Doing so would help confirm the legitimacy of the US accusation.

In the coming months, should SBV cut more interest rates to support the economy? The answer must firstly depend on the evolution of inflation in Vietnam in the near future. If inflation continued to soften, then obviously, SBV would have more room to cut interest rates further.

While this rate cut could affect exchange rate stability and cause the dong to depreciate its nominal value against the US dollar slightly, this was not, and should not be, considered a risk factor for the US trade retaliation. Because, as the writer had argued before, accusations of currency manipulation of the US or any other country should not be based on domestic policy actions such as loosening monetary policy (to export promotion and economic growth), which was only allowed based on clear evidence that the host country intervenes directly in the exchange rate, like the US dollar buying or selling.

It should be further noted that the inflation gap between the US and Vietnam remained at a relatively significant level this year (and the coming years), the real USD/VND exchange rate had been and would continue to increase, thereby negatively affect the competitiveness of Vietnamese goods and services. Therefore, maintaining a stable nominal VND/USD exchange rate would not be enough to limit this real appreciation of the dong. Instead, it was necessary to let the nominal VND/USD exchange rate weaken according to the inflation gap between the two countries and the inflation in Vietnam against the set inflation target.

The adjustment of the weaker nominal exchange rate, if any, should be done mainly by adjusting the policy interest rates instead of direct intervention by buying the US dollar as in the past.


Category: Finance, Vietnam

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