The State Bank of Vietnam may lift its interest rates by 50 basis points in late 2022 to maintain the country’s moderate growth, given rising inflation risks and the U.S. Federal Reserve’s aggressive rate moves, according to Maybank Kim Eng Securities.
"A 50-basis point increase would bring the refinance rate to 4.5%, which remains in line with Vietnam’s historical standards, compared to the pre-pandemic rate of 6% until February 2020," said MBKE analysts.
The broker maintained Vietnam’s GDP growth forecast at 5.8%, but inflation "could rise to 4%" in 2022.
Vietnam's industrial production, exports, and retail sales recovered in April thanks to the weakening Omicron wave in March and the return of tourists. However, surging demand induced by economic reopening, supply pressures stemming from the ongoing Russia-Ukraine war and China’s lockdown, or even supply shocks like Indonesia's palm oil export ban will impact the country’s economic activities in the coming months, it noted.
Dr. Can Van Luc, head of the BIDV Training and Research Institute, said that the Fed’s addition of 0.5% percentage points, the largest increase since May 2000, will have a direct impact on Vietnam's economy and finances.
Since the Fed’s first move on March 16, the U.S. dollar/Vietnamese dong exchange rate has increased by 0.36%, while the U.S. Dollar Index increased by 4.25%. Rising exchange rate pressures and inflation have prompted certain credit institutions to boost deposit interest rates by 0.3-0.5 percent, resulting in a series of consequences on Vietnam’s economy, according to Luc.
Firstly, rising global interest rates could slow the world economy, reducing demand for Vietnam's exports. Secondly, the USD/VND exchange rate would probably increase by 0.8-1.2% in 2022. Thirdly, rising interest rates will raise the costs of new loans and debt repayment obligations in U.S. dollars. Finally, it will impact on investment capital flows in Vietnam, especially foreign indirect investment.
Luc believed that the government should continue to proactively and flexibly develop a monetary policy amid a scenario of major central banks’ stronger monetary policy change. "It should be well-coordinated with fiscal policy, ensuring the stability of interest rates and exchange rates, and curbing inflation in line with the country’s target."
He added that it is vital to design a scenario in case the Fed quickly raises interest rates or the global economic recovery weakens, causing swings in the global financial markets.