Fed's aggressive rate cut may prompt Vietnam central bank to consider policy easing: UOB

The U.S. Fed’s recent deeper-than-expected interest rate cut may increase the likelihood and pressures on the Vietnamese central bank to consider similar policy easing, said Suan Teck Kin, head of research at Singapore-based bank UOB.

The Fed on Wednesday decided to reduce the target range of its Fed Funds Target Rate by 50 basis points (bps) to a range of 4.75%-5.00%. This was a deeper cut than UOB’s expectations (of 25 bps) and marked the “good strong start” to the Fed’s rate cut cycle, according to FOMC Chair Powell.

Commenting further on the State Bank of Vietnam's (SBV) path forward, the researcher expected the Vietnamese central bank to maintain its key policy rates for the rest of 2024, despite the impact of typhoon Yagi and a notable rebound in the USD/VND exchange rate since July.

This is because the SBV keeps an eye on upside risks on price pressures. The overall consumer price index (CPI) rose 4% year-on-year in January-August, just slightly below the government’s 4.5% target.

“Upward pressures on prices may be more intense following the disruptions to agricultural output, as food accounts for 34% of CPI weight,” said Suan.

The SBV is likely to adopt a more targeted approach to support impacted individuals and businesses in their regions, rather than implementing a broad, nationwide tool such as interest rate cuts.

“Consequently, we anticipate SBV maintaining its refinancing rate at the current 4.50% while focusing on facilitating loan growth and other support measures,” said the researcher.

Regarding the Fed’s next moves, the Global Economics and Market Research, UOB, expects the bank to continue the rate cut cycle in the remaining meetings of 2024, with anticipated 50-bps cuts for the remainder of 2024 (i.e. two 25-bps cuts, one each in November 24 and December 24 FOMC).

They maintain the expectations of 100 bps of cuts in 2025 (one 25-bps cut per quarter).