Vietnam central bank cuts OMO interest rate to 4% per year

Vietnam's central bank on Monday lowered its interest rate on open market operations (OMO) to 4% per annum from 4.25% that had been in place since early August.

The move came amid expectations that the U.S. Federal Reserve (Fed) will lower interest rates sooner than anticipated.

Earlier, on August 5, the central bank, or the State Bank of Vietnam (SBV), had cut the rate from 4.5% per annum to 4.25%.

This cut reversed the trend of increasing the rates earlier in the year, when the SBV had raised the OMO rate twice, in mid-April and May 2024, from 4% to 4.25% and then from 4.25% to 4.5%. However, the amount of OMO allocated in the latest auction was relatively low, totaling just over VND536 billion ($21.76 million).

The SBV's move is considered appropriate given the continuous declines of the USD/VND exchange rate in recent weeks due to increased foreign reserves and expectations that the Fed will lower interest rates in the near future.

On the interbank market, the USD/VND exchange rate fell to VND24,543 on September 13, down VND47 from a week earlier. Since the end of July, the exchange rate has dropped by approximately 2.8%.

The USD/VND exchange rate quoted by domestic banks also declined significantly. By September 13, the selling rate at banks was around VND24,730-24,750 per USD, while the buying rate was between VND24,360-24,400 per USD.

Since early August, the USD price at banks has decreased by about VND700, or 2.7%, narrowing the depreciation of the VND against the USD from 4.3% in June and July to 1.3%.

In the informal market, the USD price dropped to below VND25,000 per USD on both buying and selling sides. Compared to the peak of nearly VND26,000 recorded at the end of June, the USD price has fallen by nearly VND1,000, or 3.8%.

Alongside the OMO rate cut, interest rates on the interbank market have also decreased significantly across most terms.

Specifically, the overnight (ON) rate dropped by 1.15 percentage points to 3.44%, reflecting the ample liquidity in the banking system, particularly as the SBV continues to implement measures to net withdraw money from the market.

According to the SBV, from September 9 to 13, 2024, the central bank withdrew VND37.57 trillion ($1.53 billion) through reverse repos. This indicates its efforts to balance between liquidity injection to support the economy and controlling inflation, avoiding excessive monetary expansion that could lead to future inflationary pressures.

Economists believe that the continued reduction in the OMO rate is part of a flexible monetary policy aimed at responding to global economic fluctuations and maintaining domestic economic stability.

In the future, if macroeconomic factors such as inflation, exchange rates, and credit growth are well managed, interest rates in the market may continue to trend downward, facilitating economic recovery and growth.