Vietnam’s central bank likely to further cut rates: UOB

The State Bank of Vietnam would continue to lower its rates cautiously and deliberately in the second quarter of this year because one area of focus for the central bank is clearly the domestic inflation trend, says the United Overseas Bank’s (UOB) Global Economics & Markets Research team.

SBV cuts key interest rate

The SBV announced the lowering of the key refinancing rate by 50 basis points to 5.5%, effective from April 3. This is the latest policy move to support economic growth. The SBV’s move did not come as a surprise, given the earlier announcements, and the unexpectedly soft Q1/2023 GDP growth rate which was released a day earlier.

We continue to see the scope for the SBV to lower by a total of 100 basis points in Q2. This means that there is likely another reduction of the refinancing rate by a further 50 basis points before the end of June. Beyond that, the central bank is likely to approach further rate cuts in a cautious and deliberate manner due to considerations for domestic prices and global developments.

Regarding the FX outlook, the VND stood out as one of the most stable currencies in Asia. Despite the big shifts in Fed rate hike expectations, global recession worries and U.S. banking turmoil, the VND traded a tight 0.8% from either side of 23,600/USD. Overall, we expect the USD/VND pair to track other USD/Asia pairs higher to 24,200 in Q2 before easing lower to 24,000 in Q3.

SBV lowers key policy rate

In just about two weeks after an earlier notice of various interest rate cuts, the SBV announced late in the evening last Friday (March 31) the lowering of the key refinancing rate by 50 basis points to 5.5%, effective from April 3. This is the latest policy move to support economic growth.

The discount rate, which SBV unexpectedly reduced by 100 basis points to 3.5% (from 4.5%) on March 16, will be kept unchanged at 3.5% and the overnight lending rate in the inter-bank market will also remain at 6% and unaffected by the latest policy announcement.

In its latest announcement, the central bank also said it would lower caps on interest rates of deposits in Vietnamese dong by 50 basis points to between 0.5% and 5.5% for maturities below six months. The ceiling on interest rates for short-term loans in some priority sectors will be reduced further to 4.5% from 5%. Note that in its March 16 announcement, the SBV trimmed the cap on the lending interest rates for short-term loans in some sectors to 5% from 5.5%.

Potential for rates to head lower

The SBV’s move to lower its key refinancing rate did not come as a surprise, given that the central bank had announced the lowering of other related interest rates back on March 16. Another catalyst for the SBV to push forward was the unexpectedly soft Vietnam’s Q1/2023 GDP growth rate which decelerated to 3.32%, from 5.92% in Q4/2022 that was released just one day earlier.

In addition, there were also signs of market stability with the disturbances to the U.S. and European banking sectors from the recent shocks subsiding (Silicon Valley Bank’s failure and the acquisition of Credit Suisse by Swiss bank UBS) and the US Federal Reserve on the verge of reaching the end of its rate hike cycle.

As we suggested in our earlier report on March 30, there would be an “increasing bias for the SBV to shift towards a more accommodative stance ahead”, with a 100 basis point cut to the refinance rate in Q2/2023.

While the SBV has shifted towards a more accommodative stance, it does not mean the start of a rate-cut cycle, at least not just yet. The central bank is likely to approach further rate cuts cautiously and deliberately. One area of focus for the SBV is clearly the domestic inflation trend.

While some easing signs have surfaced on the inflation front, with Vietnam's consumer price index gaining 4.18% year-on-year in Q1/2023, below the government’s target of 4.5%, core inflation has yet to see a meaningful slowdown.

Core inflation (which excludes food, energy, and other public services prices) accelerated to 5.01% year-on-year in Q1-2023 from 4.76% in Q4/2022 and 3.17% in Q3/2022. This trend is likely to be of concern to the central bank with core inflation gaining 4.88% year-on-year in March, the sixth straight month that the indicator is hovering above the 4.5% target.

Besides considerations on consumer prices, any cumulative cut larger than 100 basis points would also depend on stability in the banking sector in the U.S. and Europe, particularly the extent of the spillover effects on global demand from the year-long US Fed’s rate hike campaign.

Including the 50 basis points cut just announced, we continue to see the scope for the SBV to lower by a total of 100 basis points in Q3/2023. This means that there is likely another reduction of the refinancing rate by a further 50 basis points before the end of June in a bid to support domestic economic activities.

FX outlook: dong to stay stable

The VND stood out as one of the most stable currencies in Asia. Despite the big shifts in Fed rate hike expectations, global recession worries and U.S. banking turmoil, the VND traded a tight 0.8% from either side of 23,600/USD.

Despite the SBV’s surprise 100 basis points rate cut to the discount rate on 16 March, a rebound in exports and industrial production in the months ahead together with easing inflation are likely to anchor the VND stability.

Overall, we expect the USD/VND pair to track other USD/Asia pairs higher to 24,200 in Q2/2023 before easing lower to 24,000 in Q3/2023, 23,800 in Q4/2023, and 23,600 in Q1/2024.