HSBC backtracks call of further rate cut by Vietnam central bank

HSBC has removed its earlier call of another 50 basis-point rate cut by the State Bank of Vietnam (SBV), the country’s central bank, in the rest of this year as the conditions that previously warranted the move have dissipated.

In its latest Vietnam update titled “Light at the end of the tunnel,” HSBC highlighted that Vietnam’s economy has passed its trough, but upside risks to inflation have resurfaced, prompting the bank to upgrade its 2023 average inflation forecast to 3.4% from 3.2% previously, below the government’s 4.5% ceiling.

“Given an ongoing recovery, rising inflation, and resumed FX risks, we believe conditions no longer warrant our earlier call of a final 50bp rate cut. In other words, we now expect the SBV to hold its policy rate steady at 4.5% throughout 2024, barring any major external shocks,” HSBC researchers wrote.

They explained that food prices in Vietnam had risen around 3% month-on-month for two straight months, pushing year-on-year inflation to overshoot 10%. While Vietnam’s trade benefits from higher rice prices, international prices have pushed up the local prices of staple goods. Meanwhile, Vietnam is sensitive to the global oil market’s recent volatility.

They said they do not expect a repeat of what happened last October, when a rally in the USD/VND rate propelled the SBV to hike rates aggressively. This is because Vietnamese dong's fundamentals have improved.

For example, its current account surplus has almost returned to its previous peak of close to 5% of GDP, on a rolling basis, thanks to a robust trade surplus, strong remittances, and rising tourism receipts.

Vietnam’s GDP growth gained momentum throughout quarters this year, hitting 5.33% in the third quarter, compared to 3.28% in Q1 and 4.05% in Q2. In the nine months through September, the local economy expanded 4.24%.

HSBC has maintained its 2023 growth forecast for Vietnam at 5%, with a strengthening rebound in Q4. The International Monetary Fund (IMF) kept its 2023 forecast for Vietnam unchanged from its April projection at 4.7%. The World Bank revised down its prediction to 4.7% in 2023.

Party General Secretary Nguyen Phu Trong said Sunday that Vietnam’s economic growth may surpass 5% this year, below the mandated 6.5% but fairly high in comparison with many countries in the region and the world.