Central bank of Vietnam raises interest rates to rein in inflation

Update: 23-09-2022 | 18:56:41

The State Bank of Vietnam (SBV) has decided to raise operating interest rates by approximately 1% as of September 23 in an effort to keep inflation in check and maintain the macroecnomic stability.

Accordingly, the central bank increased the refinancing interest rate from 4.0% to 5.0% per year, rediscount rate from 2.5% to 3.5% per year, and overnight lending rate in interbank electronic payment and lending to offset the capital shortage in the clearing payment of SBV with banks from 5.0% to 6.0% per year.

The interest rate for non-term and one-month deposits in VND is to be capped at 0.5% annually, while that for one to six month deposits will stand at 5%.

The move comes following the Federal Reverse (Fed) raising interest rates by 0.75% on September 21, marking the third rise this year in an attempt to tighten monetary policy and curb high inflation.

Addressing a press briefing in Hanoi on September 23, Dao Minh Tu, deputy governor of the SBV, affirmed that the central bank would continue to execute monetary policy in a cautious, flexible and synchronous manner.

Controlling inflation and sustaining the macroeconomic stability is the top priority of the State Bank of Vietnam, affirmed Tu.

He went on to say that the central bank would continue to keep a tight grip on risky areas such as real estate and securities, including the purchase and sale of corporate bonds of credit institutions in accordance with regulations to ensure the safety of the system.

VNDIRECT Securities experts described the SBV’s decision as being a timely, yet relatively drastic move amid rapid changes occurring in the international financial market. However, they were a bit surprised at the 1% hike, a figure which is higher than their previous forecast of 0.5% for 2022.

After adjustments made in the interest rate hike, it is unlikely that there will be another rise in operating interest rates this year. It is forecast that the deposit interest rate may increase by between 0.3 – 0.5% from the existing level by the end of the year. In line with this, the 12-month deposit rate of commercial banks is anticipated to increase to between 6.1% and 6.3% annually by the end of the year.

Think tanks also noted that the exchange rate will remain under pressure moving into the final months of the year, particularly as the US$ will jump to a new two-decade high as a result of the FED maintaining the roadmap in order to raise interest rates. In line with this, the VND exchange rate is projected to depreciate by between 3.5% and 4% against the US$ in 2022.

Amid the impending hike in interest rates, experts emphasised the need to accelerate the implementation of the 2% interest rate bailout package for businesses as a way of contributing to stabilising interest rates. According to the SBV, only VND13.5 billion had been disbursed as of August, equivalent to less than 0.1% of the disbursement plan for the year.

Analysts underlined the necessity of deploying the 2% interest rate support package faster in a bid to help curb the increase in lending rates to support businesses amid the possible hike in operating interest rates and deposit rates over the coming months.

The effective implementation of the package is therefore expected to help reduce lending interest rates by an average of 0.2 – 0.4% and partially offset the increase in interest rates, they noted.

The 2% interest rate support package is included in the VND40 trillion economic stimulus package set out in the National Assembly‘s Resolution 43 and the Government’s Decree 31 for cooperatives and businesses operating in key industries such as aviation, tourism, transportation and warehousing, agriculture, forestry and fishery, and manufacturing processing.

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Central bank of Vietnam raises interest rates to rein in inflation

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