FED rate cut will not impact Vietnam monetary policy
The monetary policies of different Central Banks are different, dependent on the economic and monetary conditions of different countries, and less dependent on the interest rate trend of FED.
For example, since 2015, while ECB has maintained a low interest rate, FED has increased its rate continuously. The EU group grows slowly and faces risk of recession, that’s why its Central Bank has to keep a low interest rate for a long time. Over 2015-2018, other Central Banks of Japan, Brazil, India, Hungary and Indonesia also have cut their interest rates.
Vietnam has maintained an independent monetary policy with FED. Over the last times, while FED has continuously raised its rate, the Open Market Operations (OMO) interest rate has been stable and reduced only slightly, and the interest rate of treasury bill has moved sideways. With the target to stabilize the macro economy and support the economic growth, the State Bank of Vietnam favors a flexible monetary policy. It will be more tightened when facing inflation risk and risk of foreign exchange rate increase and will be more easing when these risks fade away.
Since 2015, when the inflation risk reduced significantly, the monetary policy has focused more on controlling the movement of foreign exchange rate. When the US-China trade war escalated, the foreign exchange rate surged suddenly, and the State Bank had to sell more treasury bills to withdraw the money. It later pumped back this money amount into the economy when the market was more stable.
Based on this logic, the expected interest rate cut of FED in July will not impact much the monetary policy of Vietnam. However, the expectation that the interest rate of Vietnam will decrease in coming times can be explained by other reasons.
Interest rate expected to drop in second half of 2019
It is reasonable when people expect the interest rate to drop to save the interest cost for individuals and companies and to support the growth of the economy. Credit policy and interest rate policy, the two tools of monetary policy, have been moving in different ways, recently. While the State bank has gradually tightened the credit policy which is shown by lower credit growth target every year, the interest rate has dropped over the last time.
The credit tightening policy is suitable to the target of the government to restructure the whole banking system. The banks that have good quality assets and qualify for the standards of Basel II will be allowed to grow at higher credit growth. Reversely, the banks that have low quality assets or are on the restructuring process will be allowed to grow at lower credit growth.
Banks are required to prioritize to lend some important sectors like agriculture, technology and exports, while having to limit the credit growth in some high risk sectors like real estate and stock market. Hence, although the State Bank has set lower target of credit growth for this year at 12-14%, the GDP has still potential to grow at 7-8%. So, the deceleration of credit growth is something related to strategy changing to improve the effectiveness of credit activity, and create conditions to develop the capital market, rather than signal that the State Bank is tightening its monetary policy.
It is normal to see the interest rates, including lending interest rates and government bond interest rates, go down. The interest rate of Vietnam is currently much higher than that of other countries, impacting the production cost, competitiveness and domestic demand.
The reason that Vietnam has higher interest rate is because the State Bank has to control inflation and foreign exchange rate. Now the inflation has cooled down, the foreign exchange is stable, hence, it is reasonable for the State Bank to pump more liquidity into the market and reduce the interest rate.
Recently, when the foreign exchange rate has been less volatile, the State Bank has stopped selling treasury bills, pumped back the money into the market and scaled down the interest rate. That was why OMO interest rate, and government bond interest rate dropped in both primary and secondary markets over the last time.
Recently the pressure that makes the foreign exchange rate increase has faded away given the three below drivers.
Firstly, it is expected that the US-China trade war will cool down sometime in 2019 and the Central Bank of China policies will stabilize the CNY to support the economy. These two factors will help reduce the pressure on the USD/VND exchange rate.
Secondly, the foreign currency inflows have increased over the last time thanks to the increase of FDI and the attraction of some big M&A deals in the domestic market like Vin Group and BIDV.
Thirdly, the trade balance surplus in July reached USD 1.2bn and the trade balance is expected to continue being in surplus in 2019 given the increase in exports in FDI sector.
Based on above analysis, the decrease in interest rate of FED is expected to not impact directly the monetary policy of Vietnam. It may indirectly help in reducing the VND interest rate and stabilize the USD/VND rate.
If there is a new movement in the US-China trade war or if new events happen in the market, the VND interest rate might rise back again even though FED is expected to cut its interest rate.