Vietnam's central bank examines interest rate cuts amid diverging expert forecasts

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Vietnam's central bank examines interest rate cuts amid diverging expert forecasts

The State Bank of Vietnam (SBV) is considering further reductions in its policy interest rates to stimulate credit growth and bolster economic expansion, despite differing predictions from financial experts. The SBV's current priority is to lower interest rates, a move that some experts believe could occur towards the end of the third or fourth quarter of 2023.

Banking expert Nguyễn Trí Hiếu anticipates that deposit interest rates will continue to decrease in the remaining months of this year. However, he noted that rates cannot decrease as significantly as at the beginning of the year due to banks needing to ensure their profitable business performance. Furthermore, if deposit interest rates drop sharply, banks may face challenges in attracting idle money compared to other investment channels.

Hiếu also suggested that lending interest rates might not see significant reductions in line with deposit interest rates due to the necessity of maintaining the safety of the banking system. He added that any potential further interest rate reduction by the SBV would depend on the global financial situation, particularly if the US Federal Reserve (Fed) raises interest rates.

Economist Lê Duy Bình, CEO of Economica Vietnam, concurred with Hiếu, stating it is difficult to expect strong and consecutive reductions in policy interest rates from the SBV in the last months of this year due to VNĐ-denominated interest rates' dependency on those in major economies. He also highlighted that the pressure to increase interest rates in the US and Europe has not completely cooled down.

On a more optimistic note, expert Ph.D. Đinh Trọng Thịnh believes that interest rates will decrease significantly by about 1.5-2 percentage points from now until the end of this year. Yuanta Vietnam Securities Company also predicts that the SBV will continue to cut policy interest rates by approximately 50 basis points in the third quarter this year.

However, Maybank Securities Company forecasts the SBV will keep policy interest rates unchanged due to risks of exchange rate pressure amid rising US bond yields. The company also expressed concern that over-reliance on loose monetary policy could lead to higher bad debt and instability in the banking system in the long term.

The World Bank (WB) recently warned that there is limited room for Vietnam to further loosen monetary policy. The WB noted that credit demand continues to be low despite decreased interest rates and further cuts are unlikely to promote the desired credit growth. Additionally, a further interest rate cut by Vietnam could increase the interest rate gap with global markets, potentially putting pressure on exchange rates.

Dr. Trần Hùng Sơn, lecturer at the University of Economics and Law under the HCM City National University, echoed this sentiment, stating that a sudden increase in credit demand would still be challenging if interest rates were reduced too quickly.

Currently, experts and investors expect the Fed to keep interest rates unchanged at its September meeting. However, they acknowledge the risk of another interest rate hike in the last months of this year after a recent report showed US’s core inflation accelerated in August. In such a scenario, the SBV may exercise caution and delay its policy rate cut until early 2024.

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