Vietnam central bank raises OMO, T-bill interest rates as dong weakens

Vietnam's central bank has increased interest rates for open market operation (OMO) financing and treasury bills as it tries to rein in the devaluation of the Vietnamese dong.

The State Bank of Vietnam (SBV) pumped VND25 trillion ($981.6 million) into nine commercial banks on Wednesday via OMOs at 4.5% per annum, up 25 basis points (bps) from Tuesday, SBV data showed.

This was the second increase in OMO rates over the past month. On April 23, the banking regulator lifted the OMO rate by 25 bps to 4.25%.

The same day, the SBV issued VND650 billion ($25.5 million) worth of 28-day T-bills at a winning rate of 4% per annum, up 10 bps from the previous session.

These interest rate increases come as the country incurred a trade deficit of $2.63 billion in the first fortnight of this month, according to customs data.

Furthermore, the Vietnamese dong (VND) has persistently weakened against the U.S. dollar, losing some 5% in value versus the greenback since the start of this year. The USD/VND exchange rate has stayed elevated at VND25,450 a dollar on the interbank market.

The SBV raised its central reference exchange rate by VND4 on Thursday to VND24,258 a dollar. State-controlled Vietcombank quoted the greenback at VND25,240-25,470 a dollar, the upper limit set by the SBV. Similar rates were seen at other major forex traders like Eximbank and Techcombank.

According to analysts with Ho Chi Minh City-headquartered lender ACB, the SBV has sold some $2.5 billion in foreign currencies to local commercial banks since April 19, withdrawing an equivalent amount of VND.

Local economists reckon that the simultaneous usage of T-bills and OMOs serve the dual targets of injecting liquidity into the banking system and easing the pressure on the USD/VND rate by narrowing the interest rate gap on the interbank market.

If the USD-VND rate spread is reduced, the SBV will endure less pressure to sell hard currency, they added.

SBV data showed that the overnight rate on Monday (May 20) reached 4.01% per annum, while the respective rates for one-week and one-month terms were 4.22% and 4.38%.

Researchers with the Hanoi-based Vietnam Institute for Economics and Policy Research (VEPR) and Think Future Consultancy said in a recent report that the SBV had taken three steps to control the USD/VND rate in 2022-2023. They were draining liquidity by selling T-bills and other operations to raise interbank interest rates; sales of foreign currency to survey demand and stabilize the market; and raising policy interest rates if the two preceding steps were not effective enough.

The researchers deemed that the third step would be the most effective to rein in the forex rate, given demand for hard currency staying high amid a thinner trade surplus.

A recent report by Viet Dragon Securities pointed out that increasing OMO interest rates would be a tentative step for a potential rise in policy interest rates to curb the dong’s slide.