Good short-term effects for Vietnam after Fed's rate cut

Inside a BIDV transaction office (Source: VNA)

The US central bank on July 31 announced its first rate cut since 2008 by 25 basis points to the range of 2-2.25 percent.

The rate cut would increase the value of investment into equity and commodity assets as the US dollar was weakened, encouraging international investors to purchase more local assets, Hieu said.

The rate cut was among reasons for US stocks to decline on July 31. However, the main reason was still worries about US-China trade tension, which has remained unsolvable, he added.

In the short term, the rate cut may benefit Vietnam’s economy and equity assets, he said, adding gold would go up and the real estate market would be stabilised.

The Fed’s rate cut may allow Vietnam’s banks to lower their interest rates in some priority sectors, but the average level may not decline further, analysts have said.

On August 1, commercial banks in Vietnam cut interest rates on VND loans in the Government’s priority sectors for the second time this year to support the business community.

Vietcombank, BIDV, VietinBank and Techcombank reduced their short-term interest rates by 0.5-1 percent and capped them at 5.5-7.5 percent.

Lending rates in Vietnam were high, therefore, the Fed’s small rate cut would not have a direct and immediate impact on the local credit market, Hieu said.

In the long term, the VND would not depreciate, he said. “Vietnam depends on a weak VND to support its exports. As the Fed’s rate cut weakens the US dollar, the VND may not be devalued further so that it could stabilise.”

According to specialist Le Xuan Nghia, the Fed’s rate cut helps increase the supply of the dollar to the market and devalue the greenback, making the VND and other currencies weaken further accordingly. That means the VND/USD exchange rate is unchanged but Vietnamese exports may be hurt if the VND weakens too much against other currencies.

If the Fed continues loosening its interest rates, other central banks can do the same to depreciate their currencies. In that case, the supply of cash increases and global long-term inflation occurs, requiring the Vietnamese Government to work on detailed solutions to deal with it.

Accordingly, the VND is forecast to gain 1-3 percent in value against the US dollar in the remaining months of 2019 given the unpredictability of the global markets.

As the Fed chairman Jerome Powell gave no clues about further rate cuts this year, central banks of emerging markets must be more cautious with their monetary and interest policies in the future, according to Bao Viet Securities Co (BVSC).

A number of central banks, including Vietnam’s, have lowered their lending rates to counter a worldwide economic slowdown since the beginning of the year when the Fed signalled it may lower interest rates. But after August 1, those central banks have halted their monetary loosening plans until further announcements by the Fed instead of acting in advance.

Though Vietnamese banks recently cut rates to boost their lending volumes, the practical impact may not be enormous, BVSC report said.

Unlike other central banks, the State Bank of Vietnam (SBV) tries to control the total cash loaned to the market and the total savings and deposits. Meanwhile, the connection between interbank interest rates and market interest rates and the liquidity of the banking system, despite remaining high on low interbank interest rates, doesn’t mean lenders have sufficient cash on the market. Cash liquidity among banks is highly differentiated, making deposit and saving interest rates still high, thus lending rates will not be reduced much.

VNS/VNA