Vietnam's central bank cuts policy rates for first time in 2 years

The State Bank of Vietnam on Tuesday announced a 1 percentage point reduction on several policy interest rates to bolster the economy and aid businesses.

The annual rediscount rate will fall from 4.5% to 3.5%, while the overnight electronic interbank rate and interest rate for loans to offset capital shortfalls in clearance between the central bank and domestic banks will drop from 7% to 6%, the central bank said in a statement.

The maximum short-term lending interest rate in Vietnamese dong for priority sectors has also been cut from 5.5% to 5% per year. The maximum short-term lending rate in Vietnamese dong at public credit funds and microfinance institutions has fallen from 6.5% to 6% per year.

The adjustments to policy rates does not apply to the ceiling deposit interest rate.

The new rates will take effect from Tuesday, March 15.

The previous adjustment was made last September, with several policy rates including the ceiling deposit rate rising by 0.3-1 percentage points a year.

The latest move by Vietnam's central bank also reverses a trend of rate hikes, with the last one in October 2022.

The SBV said cutting the policy rates is "an important step and orientation for the market's interest rate reduction trend in the coming time". This is a signal to guide banks to reduce lending rates, contributing to removing difficulties for businesses and the economy.

Currently, the monetary market is stable, while the banking system's liquidity is abundant, meeting the payment needs of the economy, the SBV noted.

However, it argued that caution should still be exercised when it comes to inflation issues, given that the index in the first two months of the year already neared the target level of 4.5%, while global inflation is forecast to remain high.

Major central banks around the world have continued tightening monetary policies, increasing or keeping interest rates high, amid anticipation over the US Federal Reserve's (Fed) move at its next meeting on March 21-22 following the collapse of U.S. banks Silicon Valley Bank and Signature Bank.

In early February, ratings agency Fitch forecast Vietnam would raise the policy rate by 100 base points this year due to a difficult inflation outlook.

With last year’s 8.02% economic expansion, the highest in 12 years, Vietnam was one of Asia’s fastest-growing economies. However, the high growth rate in 2022 was partly derived from the low growth base in the pandemic years 2020-2021, at 2.91% and 2.58% respectively.

Despite the impact of the inflation "storm" from the U.S. economy and many other economies, Vietnam's inflation in 2022 was reined in at 3.15% compared with 2021's average, lower than the target of 4%. This was a significant result, given that 2022 inflation was estimated at about 5.7% in developed countries and 8.7% in developing and emerging countries.

The consumer price index (CPI) in February rose 4.31% year-on-year.