Central bank in no rush to tighten monetary policy: broker VnDirect

By Phan Ca
Sun, June 19, 2022 | 9:06 am GMT+7
Headquarters of the State Bank of Vietnam in Hanoi. Photo courtesy of Vietnam News Agency.

Headquarters of the State Bank of Vietnam in Hanoi. Photo courtesy of Vietnam News Agency.

The State Bank of Vietnam is in no rush to tighten monetary policy despite the U.S. Federal Reserve’s rapid interest rate hike, according to top broker VnDirect Securities.

The central bank is likely to maintain an appropriate monetary policy in order to support the economy's recovery and market stability, it said in a report.

"The SBV would not necessarily have to move in pace with the Fed, as Vietnam’s average consumer price index is predicted to be at 2.5% in the first half of 2022, significantly below the government’s target of 4%.

"In addition, domestic demand remains weak and has not fully recovered to pre-pandemic levels. Therefore, the central bank still prioritizes the goal of maintaining low interest rates to support businesses, as well as economic recovery."

However, the broker pointed out that the SBV's ability to sustain loose monetary policy is dwindling. "But any monetary tightening would only take place in the second half of 2022, probably in Q4/2022, and the increase would be limited to around 0.25-0.5%."

VnDirect expected the central bank to maintain high credit growth to support the economy's recovery. "Credit inflows will be prioritized to the manufacturing and service sectors, especially industry, import and export, agriculture, forestry, and fisheries."

The SBV will strictly control the credit inflow into high-risk sectors like real estate, securities, and build-operate-transfer projects, the broker added. "We maintain our prediction of high credit growth at 14% year-on-year in 2022."

The central bank is implementing an interest rate support package worth up to VND43,000 billion ($1.85 billion). VNDirect projected that the support would contribute to a 20-40 basis point reduction in the average interest rate in 2022. However, the actual support may be reduced if commercial banks boost lending rates on other conventional loans to offset the increases in deposit interest rates.

Deposit rates are expected to grow as a result of rising US dollar interest rates and inflationary pressures in Vietnam. However, the increase would be minor, amounting to about 30-50 basis points untill the end of 2022. The broker predicted that commercial banks' interest rate of 12-month term deposits can increase to 6.0-6.2% per year by the end of this year, from the current 5.7%, which is still lower than the pre-pandemic level of 7%.

The broker in a previous report stated that the "Vietnamese dong remains one of the most stable currencies in the Asia-Pacific region". As the fundamental factors supporting the value of the Vietnamese dong remain robust in 2022, including a current account surplus and high foreign exchange reserves, the appreciation of the U.S. dollar should have little impact on Vietnam's exchange rate.

Rising fuel and raw material prices drove up Vietnam's consumer price index (CPI) in May by 0.38% against April, and 2.86% year-on-year, according to General Statistics Office.

HSBC this week revised down its forecast on Vietnam’s inflation this year to 3.5% from the 3.7% it predicted in May due to stable domestic food prices.

In April, Standard Chartered forecast Vietnam’s inflation in 2022 and 2023 at 4.2% and 5.5% respectively, due to supply-side factors including rising commodity prices, especially given the current global geopolitical tension.

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