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16:47 12/04/2023

In bold move, Vietnam cuts interest rates

Financial experts say the recent decision by the State Bank of Vietnam (SBV) to cut interest rates is a bold but reasonable move given the need to ease business access to loans in order to accelerate growth.

Business stimulus

Vietnam’s central bank has adjusted interest rates twice in recent weeks, on March 15 and again on April 3, going against the current of successive interest rate hikes by the US Federal Reserve (FED) and central banks of most major economies in order to control inflation.

The SBV continuously adjusted interest rates twice in just two weeks

According to Hoang Cong Tuan, Chief Economist of the MB Securities Joint Stock Company (MBS), the reduction of regulatory interest rates is a bold but reasonable step given the relatively low GDP growth in the first quarter of 2023 compared to pre-pandemic years. Given the FED’s likely monetary policy reversal, the SBV is one step ahead of the downward trend of global interest rates, Tuan said.

Le Duy Binh, CEO of Econimica Vietnam, said, the SBV even reduced the deposit interest rate ceiling in the second adjustment, reflecting the government’s continued support for the country’s economic recovery this year.

Lowering interest rates to support
business activities

Truong Thai Dat, Head of Securities Analysis (DSC Securities Corporation) also noted that the cut in refinancing interest rates was designed to stabilize the exchange rate, while continuing to promote lower interest rates and supporting businesses.

Dr. Can Van Luc, Chief Economist of BIDV and a member of the National Monetary and Financial Policy Advisory Council, said reducing interest rates will stimulate credit demand, thereby facilitating business and people’s access to capital to boost activities and consumption, and also increase revenues for credit institutions. Given the current economic situation, this is an important boost for all sides.

Excess liquidity

Another important message sent by the SBV relates to the problem of excess liquidity, as demonstrated by two indicators. First, the large account balances of credit institutions at the SBV, continuously exceeding the reserve requirements level. Second, interbank interest rates fell sharply with overnight rates of only about 0.7 to 1.2 percent.

According to analysts, since credit growth as of the end of March had expanded only by 2.46 percent, demonstrating that the capacity to absorb economic capital remains weak, the SBV’s gradual easing of monetary policy and reduction of regulatory interest rates are considered a flexible method to stimulate credit demand. The central bank expects its moves will boost the business activities of every sector in the second quarter, which will help Vietnam’s economy achieve its targeted 6.5 percent growth rate this year.

Nonetheless, Can Van Luc warned against ignoring inflation given the relatively high consumer price index (CPI) level and potential price increases of some goods and services under state management, such as electricity, healthcare and education. Basic wage hikes scheduled for July 1, as well as this year’s high money supply mostly from public investment, credit, and other channels, are also potential causes of inflationary pressure.

Pham Chi Quang, Director of SBV’s Monetary Policy Department:

When the time is right, the SBV will continue to reduce interest rates to support the economy.

 

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