Vietnam monetary policy to persist with interest rate reduction

The State Bank of Vietnam (SBV) will continue with its interest rate reduction policy despite the possibility of other rate hikes by the U.S. Federal Reserve.

A senior central bank official explained that the SBV has room to persist with the policy with the aim of supporting economic recovery.

Since the beginning of this year, the SBV has deployed interest rate cuts four times. As a result, deposit interest rates in the market have dropped sharply.

State-owned commercial banks have led the way with average cuts of 0.5-1 percentage points in the past month. Their interest rate on 1-2 month term deposits is currently the lowest in the system at 3.4% per year. The rate is from 5% and only 6.3% per year for six-month and 12-18 month deposits, respectively.

Private commercial banks have also announced several cuts in the last few weeks with an average reduction of 0.1-0.3 percentage points per year each time, depending on deposit terms. The deposit interest rate of 8% per year is no longer seen at banks.

The highest rate at some large private banks like ACB, VIB, TPBank, Sacombank, and VPBank is currently around 7% a year (for deposits of under VND1 billion or $42,500).

At a June 21 press conference on the banking sector’s six-month performance, SBV Deputy Governor Dao Minh Tu said that the average deposit interest rate of commercial banks had gone down 0.7 percentage points compared to the end of 2022 to about 5.8% per year. The average lending interest rate in VND then stood at 8.9% per year, down 1 percentage point from late 2022.

Although interest rates have fallen sharply, credit growth has been very low. As of June 15, the country’s credit growth was just 3.36% over the end of last year.

"The main reasons for this included weak credit demand and a decline in corporate financial capacities while commercial banks haven’t lowered their lending criteria," he said.

The central bank deputy governor stressed that commercial banks had sufficient credit supply but demand was weak in line with the slowing economy. Then there are enterprises that need bank loans but fail to meet lending criteria.

The SBV expects credit growth to reach 14-15% this year, which means much higher growth in the second half of the year. Credit provided in the first half was around VND12,320 trillion ($524 billion), up 8.94% year-on-year.

Tu said the central bank planned to meet with commercial banks and persuade them to reduce costs and lending interest rates to support businesses and the economy.

On worries about possible rate hikes by the Fed, Tu said: “Even if the Fed increases interest rates, we can continue reducing them because we have controlled inflation and economic macroeconomic indicators allow us to do that.”

Therefore, reducing interest rates would be the focus of the SBV’s policy in the coming time, he said.

Economist Le Xuan Nghia said that in the current world and domestic contexts, the exchange rate pressure on monetary policy was not great.

The Fed’s pause in interest rate hikes and the weakening USD provide room for the SBV to continue reducing its policy interest rates, leading to falling lending rates in the market, he said.

While interbank interest rates were still high, it becomes very necessary for the central bank to cut interest rates, he said. He felt that lending rates should be reduced to 7-8% per year for 12-month loans from now to the end of the year.

“This is an important solution for businesses to recover and the economy to regain its growth momentum soon,” he stressed.