Vietnam central bank unlikely to raise interest rates: HSBC

The State Bank of Vietnam (SBV), the country’s central bank, is not expected to hike interest rates despite pressures from rising inflation and the dong devaluation, said HSBC researchers.

Inflation may breach the regulatory ceiling of 4.5% in Q2/2024, but this should only be briefly, before likely dropping below 4% year-on-year in Q3, said the researchers.

Inflation appears to be an imminent concern. April headline inflation rose 0.07% month-on-month, pushing the year-on-year print to 4.4%. This marks the first time in more than 1.5 years that inflation has been approaching so close to the government’s 4.5% inflation ceiling. The main drivers are high oil prices and elevated food costs.

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 SBV’s standing Deputy Governor Dao Minh Tu said late last month that the bank will continue to keep policy interest rates unchanged at present and in the coming time.

In its latest macro report, Hanoi-based Vietcombank Securities Co. (VCBS) anticipated the SBV to manage monetary tools gradually and flexibly to ensure macroeconomic stability and stop the overdone dong devaluation, helping the country retain its status as an attractive and safe investment destination.

With the SBV’s intervention, deposit interest rates are likely to rise gradually by 50-100 basis points, as there is no high demand for credit at the moment, VCBS said.

HSBC researchers pointed out that Vietnam continued its bumpy path of recovery in April, in part reflecting the highly uncertain global environment. While exports rose 10.6% year-on-year, driven by electronics, some exporters have noted concerns stemming from the Red Sea disruptions for trade with Europe. Textiles and footwear exports, for which Europe is a major destination, stalled in its recovery, falling almost 3% year-on-year.

“That said, an expansion of Vietnam’s manufacturing capabilities through robust foreign direct investment (FDI) inflows should provide a further tailwind to a stronger cyclical rebound when the broader trade cycle picks up,” they added.

New FDI in the manufacturing sector rose 50% year-on-year, while FDI disbursements also rallied to a multi-year-high, exceeding $6 billion in the first four months.

Apple, which has already invested some $16 billion in Vietnam through its supply chain, has announced its intention to further boost its investment in Vietnam after CEO Tim Cook visited the country last month.