Interest rate cut contributes to supporting economic growth
In fact, although the operating interest rate has been reduced 3 times, the lending interest rate is still high for most businesses. Photo: Quy Hoa
The State Bank reduced operating interest rates by 0.5 percent every year. The 4th interest rate reduction occurred in 2023. Capital absorption is a concern for the economy. High-interest rates affect corporate activities. Mr. Chau Dinh Linh, Banking University of Ho Chi Minh City, said, "Cutting rates will partly boost capital demand."
Although the operating interest rate was cut 3 times, most firms' loan interest rate is still high. Operating interest rate cuts are needed notwithstanding the delay. This will benefit the second half of the year. In the environment of business challenges, limited capital absorption, and reduced economic credit expansion, lower rates are expected.
After the first quarter of 2023's growth rate dropped dramatically to 3.3% compared to last year, HSBC experts said Vietnam continued to prepare for difficulties. Although the latest statistics show that the situation was not too severe, Vietnam's economy has not shown any signs of "bottoming out" to rebound.
Indeed, slowing external sector data remains the biggest risk to growth. Year-to-date exports have fallen by more than 10% compared to the same period last year, a decline reflected in many categories.
Consumer electronics, textiles/leather/footwear, equipment, and wooden furniture all witnessed double-digit declines with no prospect of recovery. Vietnam's GDP grew 3.3% in the first quarter of 2023, down 16.9% from the previous quarter. The government is worried about output and commercial stagnation after several enterprises collapsed.
In addition to the urgency in supporting growth, the State Bank of Vietnam's move to continue lowering the operating interest rate continues to reflect a positive sentiment on the prospect that inflation is still under control.
Two important factors affecting the operation of the central bank include the US Federal Reserve's USD operating interest rate (FED), thereby affecting the price of Vietnam; and inflationary pressures.
Inflation has recently dropped below 3% year-on-year. This level is much lower than the ceiling of 4.5% thanks to the support of world energy prices and the easing of domestic food inflation.
Currently, although credit has grown rapidly since the second half of March 2023, in general, the first 5 months of the year still grow slowly. Therefore, it is forecasted that in the second half of 2023, the State Bank will both inject money and lower the operating interest rate.
However, one issue that the State Bank needs to consider is monetary stability. Despite the recent strengthening of the USD, the VND has remained relatively stable thanks to the improving current account situation. However, the movements of the VND/USD exchange rate pair still need to be closely watched because the FED is unlikely to complete the tightening cycle.
"When inflation shows signs of slowing down, the State Bank of Vietnam has loosened monetary policies. to support the economy," according to the World Bank's 5-month economic analysis of Vietnam. However, the monetary policy regulator would need to constantly watch the divergence in monetary policy direction in Vietnam compared to other countries, which could impact capital flows and exchange rates.
The USD is weak and hard to appreciate compared to other currencies, which is an advantage. After that, Vietnamese operators can relax, relaxing the currency and injecting money. If the US inflation roadmap doesn't happen swiftly, the Fed may only have one rate hike in July or September. When the Fed boosts interest rates, the exchange rate will suffer. “This is a risk,” warned Fulbright University Vietnam Senior Lecturer Nguyen Xuan Thanh.
Despite growth, Fulbright's expert said Vietnam's economy remains problematic. Because production has a favorable indication that import inventories will decline again, but this is not definite. We expect the openness of the Chinese economy to boost Vietnam's exports to China in the first quarter, however, China's economy is poor and they're easing currency after COVID-19.
HSBC also slightly downgraded its 2023 growth forecast to 5% (previously 5.2%). At the same time, it is expected that the economy will recover significantly from the fourth quarter, ensuring further support for monetary policy.
“We expect another 50 basis point drop in the third quarter. This move is likely to bring Vietnam's operating interest rate down to 4%, reversing tightening efforts in 2022, and equivalent to a rate cut throughout the pandemic. Even so, there is still a possibility of no further rate cuts in the second half of 2023 in case growth bottoms out and bounces back sooner than expected.
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Huyen Hoang