(Bloomberg) — Vietnam’s central bank unexpectedly cut the rate at which it lends to banks, underscoring the need to support the economy amid a bleak global outlook and slowing domestic demand.
(Bloomberg) — Vietnam’s central bank unexpectedly cut the rate at which it lends to banks, underscoring the need to support the economy amid a bleak global outlook and slowing domestic demand.
The State Bank of Vietnam reduced the discount rate to 3.5% from 4.5% effective Wednesday, according to a statement on its website. The authority also reduced the overnight lending rate in the inter-bank market by 100 basis points to 6% and lowered the cap on the lending interest rates for short-term loans in some sectors to 5% from 5.5%.
The regulator, which uses a combination of rates to guide its monetary policy, kept the benchmark refinancing rate unchanged at 6%.
The decision partly reverses last year’s tightening, after data showed consumer price gains slowed to 4.31% in February, the first drop in six months. The rate cuts follow Prime Minister Pham Minh Chinh’s order to the central bank to take steps to lower lending interest rates to support businesses amid an uncertain global economic outlook.
The benchmark stock index closed 2% higher on Wednesday, rising for the first time in four days while the local currency gained 0.1% against the dollar.
The central bank, which raised rates twice last year, said while inflation is under control, the economy faces many difficulties “especially with exports being slowed due to low world demand.”
“Some economic indicators also dropped from the same period last year, such as industrial production, and FDI disbursement, slowing down credit demand from businesses,” SBV said in an emailed statement where it also identified the liquidity crunch in the property and corporate bond market as a worry.
The reduction in discount rate will help bring down the cost of funds for banks, according to Nguyen Quoc Hung, general secretary of Vietnam’s Bank Association. Banks can now borrow from the SBV at a lower rate, and in turn, reduce their lending interest rates to businesses, said Hung, who was formerly head of credit department at the central bank.
Higher credit off-take will spur consumption and help the nation retain its status as one of the world’s fastest-growing economies. While Vietnam’s gross domestic product rose 8.02% last year, among the quickest in Asia, the World Bank sees expansion moderating to 6.3% this year amid global uncertainties.
“An agile monetary policy—closely coordinated with fiscal policy objectives—would help to keep domestic inflation under control,” the World Bank said in a report on March 13. “Following last year’s tightening measures, monetary policy will need to continue balancing inflation, financial stability, and growth objectives.”
The move makes the SBV the first to pivot to a dovish policy in Asia, even as the Federal Reserve weighs higher-for-longer rates to defeat stubborn inflation amid fresh challenges posed by the banking turmoil.
“Vietnam is prioritizing growth over inflation as it cuts rates ahead of the expected Fed hike next week to help ease the liquidity crunch in the real estate sector and the economy,” said Trinh Nguyen, an economist at Natixis SA in Hong Kong. This will put pressure on the local currency as consumer prices are likely to quicken in 2023, she said.
(Updates with chart and economist comment in sixth paragraph.)
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