Vietnam central bank likely to maintain monetary easing policy: Shinhan Bank

Vietnam’s central bank is likely to maintain a monetary easing policy in order to continue supporting economic growth, according to analysts with Shinhan Bank.

They say that due to the sharp decline in foreign exchange reserves and upward pressure on USD/VND exchange rate, there is a possibility that the State Bank of Vietnam (SBV), will be cautious about further rate cuts.

“Rising oil and food prices due to climate change could be potential risks, but the likelihood of a significant shift in the monetary policy stance remains low,” says a report prepared by the S&T Center, an affiliate of Shinhan Bank Vietnam.

Reviewing economic development in 2023 and early 2024, the report notes that the SBV has cut the policy rate four times in a row by 150 bps in total since March 2023 in order to stimulate the economy and support households and businesses.

Commercial banks have been also lowering loan and deposit interest rates in response to policies issued by the government and the SBV to support economic recovery.

For 2024, the SBV has set a credit growth target of 15%, compared to actual growth of 13.8% in 2023. It has directed commercial banks to implement solutions to promote credit growth and the latter are making efforts to increase credit growth by simplifying regulations and procedures as well as lowering interest rates.

The Shinhan Bank report points out that due to the ongoing property market downturn and liquidity challenges, the SBV has lowered interest rates, while the government has eased regulations on loans and corporate bond issuance.

“However, the credit institutions are facing liquidity problems, coupled with reduced demand in the real estate market, making it challenging to address cash flow and liquidity issues of real estate companies,” the report says.

It expects USD/VND exchange rate to remain high in the first half of 2024 due to negative external conditions, such as low external demand and concerns over China’s economic slowdown. However, the exchange rate is expected to reduce gradually as central banks in major countries end their tightening policies and cut interest rates, along with higher flows of foreign direct investment (FDI).

The USD/VND exchange rate in Vietnam can average VND25,090 in Q2/2024 and then decline to VND24,750 in Q3/2024 and VND24,700 in Q4/2024, the report says.

Earlier this month, HSBC researchers said the SBV is not expected to hike interest rates despite pressures from rising inflation and the dong devaluation. They argued that a rate hike in the face of still-subdued credit growth would be negative for the nascent economic growth, and would not act as a panacea to support the currency. “Therefore, we do not expect the SBV to move.”

The Asian Development Bank's (ADB) country director for Vietnam Shantanu Chakraborty said in April that the bank does not see much value in reducing interest rates further in Vietnam. "Let's use fiscal policy more effectively in 2024 and 2025 as an engine of growth rather than easing monetary policy further," Chakraborty added.