Vietnam: Policy rate hike necessary to stabilize foreign exchange market: Central Bank

High lending rates may be unfavorable for businesses, but ensuring long-term macroeconomic stability is essential for them to recover and thrive.

Amid growing fears of high inflation worldwide, the State Bank of Vietnam (SBV) has opted to raise its interest rates to control the exchange rate, stressing that market stability is key to maintaining investor confidence in the economy.

SBV Governor Nguyen Thi Hong stressed the view during a debate at the National Assembly (NA) on October 28.

During the session, NA deputies expressed concern that the SBV’s decision to raise policy rates in September and October, and the further widening of the USD/VND exchange rate band from 3% to 5%, has resulted in high-interest rates for businesses.

The governor said the move is necessary amid a complex global economic environment.

In addition to rising inflationary pressure in countries around the world, Hong pointed out that instability in the local stock- and corporate bond markets have also caused negative impacts on the monetary and financial markets.

“It would be impossible to control the foreign exchange market without raising interest rates,” Hong said.

Hong prioritized guaranteeing the security of the banking sector and providing liquidity to the market.

In this context, Hong said the benefits of a stable foreign exchange market would outweigh high-interest rates in the short term.

“High lending rates may be unfavorable for businesses, but ensuring long-term macroeconomic stability is essential for them to recover and thrive,” Hong said.

In the past month, the SBV has adjusted the policy rates two times to cope with high inflationary pressure and the appreciation of the US dollar.

The interest rate cap has been raised to 6% annually from 4% for deposits with maturities of one month to less than six months, around the level in 2014, while the deposit interest rate cap with maturities of less than one month and demand deposits slightly increased to 1% from 0.2%.

The SBV also widened the USD/VND exchange rate band from 3% to 5%.

According to the SSI Securities Corporation, the USD/VND exchange rate would continue to be under pressure as people are stocking up US dollars for their high value. Still, it remained confident that the SBV has the tools to intervene in the market if needed, especially with the high foreign exchange reserves at around $100 billion.

During the first nine months of 2022, Vietnam’s inflation rate is estimated at 2.73%, below the 4% target set by the National Assembly this year.

Hong said the rate is much lower than other countries and would be essential for Vietnam to achieve a GDP growth rate of 8% in 2022.

“SBV has done a good job of keeping the Vietnamese Dong (VND) strong for some time and a low-interest rate at the same time. It is significant given that the Yen has depreciated by 15-16%, or Euro by 20%, but the VND around 7%. So it is safe to say that the VND is among the strongest currencies. And I am very confident that the VND will come back as soon as the global economy is stabilized,” EuroCham Chairman Alain Cany told The Hanoi Times