Vietnam loosens monetary policy after Fed’s rate cut

The Vietnamese government has stepped up monetary loosening after the U.S. Fed cut its benchmark interest rates for the first time in three years.

In the week ended September 27, the State Bank of Vietnam (SBV), the country’s central bank, net pumped VND65,847 billion ($2.66 billion) via open market operations (OMOs).

Specifically, on September 23, the SBV lent VND48 trillion ($1.94 billion) via OMOs to market participants at an interest rate of 4% per annum with a term of seven days.

Four days later, the SBV provided another VND19.8 trillion ($800.2 million) in loans to five banks with the same rate and maturity.

Versus the preceding week (September 16-20), the volume offered by the SBV via this channel increased VND64 trillion ($2.59 billion), and the wining volume jumped 45-fold.

As of September 27, the outstanding volume on the OMO channel stood at VND67,359 billion ($2.72 billion), the strongest net-injection position since February 2023.

The notable injections came as interbank interest rates soared recently. The average overnight interest rate on VND-denominated loans on the interbank market rose to 4.22% from 3.28% a week earlier. Rates of other terms from one week to one month increased 60-80 basis points (bps).

The injections are meant to support liquidity of the banking system as banks boost lending to meet credit demands by the year-end.

At the government’s request, the SBV has been striving to speed up loan growth, which started off the year on an anemic footing. Credit growth reached 7.26% as of September 16 against end-2023, higher than 5.73% in the same period last year. Meanwhile, the growth had slowed to 5.96% as of end-July from 6.1% in June.

In another indication of loosening, the SBV reduced its OMO interest rate from 4.25% in early August to 4% on September 16. Before that, the central bank had cut the rate by 25 bps to 4.25% on August 5.

The SBV has refrained from issuing Treasury bills since late August to support liquidity of the system.

Experts see the moves as timely and appropriate as the Vietnamese dong has strongly rebounded against the greenback and the Fed cut its rates by 50 bps in its September meeting.

Given the easing USD/VND pressure, the SBV can now focus on boosting credit growth and stimulating domestic investment and consumption, researchers with Viet Dragon Securities said.

Besides, the State Treasury of Vietnam bought $250 million worth of hard currency last month, injecting back an equivalent amount of VND.