Vietnam's central bank asked to further cut interest rates

Deputy Prime Minister Le Minh Khai has requested the central bank to continue cutting interest rates to revive the country's slowing economy.

The central bank, or the State Bank of Vietnam (SBV), announced on Tuesday it will cut its refinance rate by another 50 basis points to 5%, effective from Thursday. The SBV will also cut the overnight electronic interbank rate to 5.5% from 6%, while keeping the key discount rate at 3.5%. This is the third policy rate cut so far this year, following those on March 15 and April 3.

However, Deputy PM Khai on Wednesday asked for further cuts. He requested the central bank to analyze factors related to providing credit to businesses, especially small- and medium-sized enterprises, thoroughly evaluate the capital absorption capacity of enterprises, and make relevant policy proposals for authorities to consider.

SBV Deputy Governor Dao Minh Tu said the central bank will continue to direct commercial banks to reduce operating costs aiming at further rate cuts and to continue debt restructuring for corporate clients.

According to Can Van Luc, chief economist at BIDV bank, Vietnam is likely to further lower interest rates as inflation pressure is falling and forex rates are stable.

As for this year’s second half, he said the central bank still has room to reduce policy interest rates but it needs to weigh inflation, the possibility that creditors will continue to reduce their lending rates, and the economy’s capital absorption capacity.

Like Luc, Tran Ngoc Bau, CEO of WiGroup, a Vietnamese provider of financial data and solutions, said the current policy rates are at 3.5-5.5%, and it is possible for the SBV to lower the range to 0.5-1% to support growth “if the economic conditions are too stressful”.

However, he noted that taking inflation and forex rates into consideration, the room remaining for new cuts is not that large. Money supplies in Vietnam are weak while interest rates across the world are high, Bau elaborated.

According to other analysts, lower policy rates will result in cuts in other rates to make capital cheaper, and therefore help businesses access credit amid the current credit crunch, which is seen as a major obstacle for the economy. This would also help residents increase spending, which in turn would help prop up the economy.

However, there is also a more pessimistic view, saying that both production and consumption are already on the decline. Therefore, residents would not have the need to borrow money from banks for spending while enterprises do not want loans for business production. Therefore, cutting interest rates will not have a clear impact if production and consumption do not recover.

Recently, domestic banks have reduced their deposit interest rates in line with the central bank’s instructions. However, loan interest rates remain high due to high demand for capital, rising interest rates on the global market, and credit institutions facing problems related to debt collection, according to the SBV.

Prolonged global slowdown together with the credit crunch and other problems in the Vietnamese slowing economy may hinder Vietnam’s 2023 GDP growth target of 6.5%.