'Precious space' in Vietnam's monetary policy

The Federal Reserve's continued cuts in 2025, with the most recent in September, are considered a valuable policy "space" for the State Bank of Vietnam (SBV) to maintain low interest rates to support growth without having to worry too much about exchange rates.

At the monthly government meeting on September 6, SBV Deputy Governor Doan Thai Son warned that core inflation had been above the 3% threshold - a level considered a "risk threshold" in monetary policy management.

He emphasized that if inflation continues to increase, the management agency needs to take proactive measures and cannot passively wait. "If inflation exceeds the threshold, pulling it back down will be very costly and cause great disruption to the economy."

Clearly, Vietnam is facing a "double war" on inflation: pressure from the economy's internal factors (increased aggregate demand, credit expansion, public service price adjustments) and external factors (oil prices, USD/VND exchange rate, fluctuations in the international market).

The Government set a GDP growth target of 8.3-8.5% for 2025, which means all resources to stimulate production, investment, and consumption must be mobilized. Disbursement of public investment capital is strongly promoted, while lending interest rates continue to decrease slightly to support businesses.

Credit in the entire economy by the end of August had increased by more than 11% compared to the end of 2024, the highest level in many years. If this trend continues, aggregate demand may exceed supply, leading to demand-pull inflation.

According to Dr. Nguyen Duc Do, deputy director of the Institute of Economics and Finance, in the context of strong recovery, rapid increase in aggregate demand is normal.

"However, if the credit speed is not controlled, the risk of inflation from the demand side will gradually increase, especially when public service prices are also adjusted to increase," he noted.

In parallel with demand, inflation is also driven by input costs because Vietnam imports most of its raw materials and fuels for production. Fluctuations in world oil prices directly affect domestic gasoline prices, leading to higher transportation and production costs.

Along with that, the adjustment of public service prices such as electricity prices rising by 1.01% in August and tuition fees and medical service prices revised up by many localities according to the roadmaps is a “cost-push” factor that are difficult to avoid.

In addition, when VND depreciates against USD, import costs increase, creating the phenomenon of “imported inflation”. Enterprises are forced to raise selling prices to preserve profits, pushing up the general price level.

Assoc. Prof. Dr. Pham The Anh, chief economist of VESS, emphasized: “Exchange rate management will be a key factor in controlling inflation in the coming months. If the VND depreciates sharply, the pressure on imported inflation will be very large, especially when Vietnam depends heavily on external inputs.”

The challenge of balancing monetary policy

In the above context, the SBV faces a classic “difficult situation”. If interest rates are kept low to support growth, credit and aggregate demand may overheat, pushing inflation above the target. If interest rates are raised to curb inflation and stabilize the exchange rate, the economic recovery momentum may slow down, affecting businesses and employment.

Currently, the SBV maintains the refinancing rate at 4.5%/year and the discount rate at 3%/year. Commercial banks are also slightly reducing lending rates. However, there is not much room for easing if inflation continues to rise.

One favorable factor is the U.S. monetary policy. The Fed has cut interest rates three times in 2024 and is expected to continue cutting in 2025, with the latest expectation in September (the meeting is expected to take place on September 19). This weakens the USD, reducing pressure on the VND.

Senior banking expert Nguyen Tri Hieu commented: "This is a valuable policy space for the SBV to maintain low interest rates to support growth, without having to worry too much about the exchange rate."

In a new macroeconomic report, Vietcombank Securities (VCBS) forecasts that average inflation in 2025 will fluctuate between 3.7-4.1%. In 2025, the Vietnamese dong may depreciate by about 5%.

VCBS expects the foreign exchange market to be more positive by the end of the year, when the Fed lowers interest rates and trade tensions ease. Deposit interest rates are still low, although they may increase slightly at some banks. Lending interest rates are forecast to remain low, continuing to support production and business.

In the current context, the advice given to businesses is to proactively hedge exchange rate risks with forward contracts and foreign currency swaps; diversify raw material supply sources; and control operating costs.

The SBV set the daily reference exchange rate at 25,216 VND/USD on Monday, September 15, unchanged from last Friday.

With the current trading band of +/- 5%, the ceiling rate applicable for commercial banks during the day is 26,477 VND/USD and the floor rate 23,955 VND/USD.

At 11 a.m. Monday, the buying rate at Vietcombank was VND26,196/USD and the selling rate VND26,476, unchanged from last Friday.

At Vietinbank, the buying and selling rates were VND26,197 and VND26,476 respectively, up VND167 and unchanged compared to last Friday, respectively.

For VPBank, the respective figures were VND26,216 and VND26,476, down VND10 and unchanged from last Friday, respectively.

Vietcombank and Vietinbank are state-controlled banks and among the Top 4 Vietnamese banks, while VPBank is a leading private bank. The above figures refer to payments via bank transfer, instead of cash.