Recently, the US Federal Reserve System (FED) reduced 0.25 percentage points of the reference interest rate for overnight loans, to 1.75 percent to two percent per year. This was the second time FED cut down on rate this year and was not out of market prediction.
Although interest rates were cut continuously in a short time, according to observers, this cut was not drastic compared with the previous one. Besides, the level of consensus was not high (three out of 10 FED members at the September meeting voted against interest rate cut). Although the possibility of reduction was still left behind, FED’s leader was inclined to the scenario of keeping interest rates unchanged until 2020.
Just last month, FED lowered the interest rate on the FED Funds Rate for the first time in more than a decade to 2.5 percent because the global economy showed signs of a slowdown and trading tension between the US and countries continues to escalate, in parallel with low inflation rates. Federal interest rates affected the interest rates of short-term loans in the US.
However, it was not only FED that set a new record on international financial markets. The direct ‘trade competitor, China, also continuously reduced the compulsory reserve ratio (four times in 2018 and three times from the beginning of 2019 until now), accompanied by many moves to reduce the value of the Chinese Yuan.
The wave of monetary easing was spreading globally. The Vietnam Financial and Monetary Market Report in August of SSI quoted Central Bank News’ calculation, saying that 23 central banks reduced the operating rate in August. The average nominal interest rate of 95 central banks in the world dropped by 38 basis points since the beginning of the year until then. More specifically, in 2018, countries increased or decreased the rates differently. By 2019, it was almost the same direction, with 93 adjustments to increase and nine changes to decrease.
Vietnam was also on this trend. Accordingly, the State Bank of Vietnam (SBV) recently announced a 25 percentage point reduction of operating rates since September 16. According to Bao Viet Securities Joint Stock Company (BVSC), this move was not too surprising when nearly two months ago, SBV took the first step of reducing 0.25 percentage points of treasury bill rates.
The discount rate this time was the interest rate in the transaction between the management agencies of credit institutions and commercial banks, such as rediscount rate, refinancing, overnight lending in inter-bank electronic payment and loans offsetting the shortage of capital in clearing, buying valuable papers and bills in term.
Therefore, many experts said that the key message was to reduce capital costs for credit institutions. According to BVSC, SBV mainly managed monetary interest rates through many other tools rather than focused on operating rates like many other countries. Thus, the impact of interest rate adjustment was not too significant. Even the interest rate cut in July also had a minimal effect on the lending interest rate level in the market. Therefore, SBV’s decision to cut interest rates was mainly oriented and psychological. Whether Vietnam loosed monetary policy or not depended on real figures in terms of credit growth and money supply in the future.
In addition to the goal of lowering lending rates and controlling credit growth, an unusual situation in Vietnam need mentioning was that the Vietnamese currency remained stable in the context that many other currencies worldwide had fluctuated sharply, lower or higher compared to the US dollar. According to SSI’s statistics, from the beginning of the year until then, dong once created a wave from the end of April to May. However the buying rate at banks only increased by 0.84 percent compared to the end of the year, at 23,360 dong per US dollar, then quickly cooled down. Even in August, the Chinese Yuan continuously depreciated (nearly three percent in August), suddenly surpassing the threshold of seven compared to the US dollar, the dong was still flat, even falling.
Dong had become one of the rare currencies with stable exchange rates against the US dollar, as the SSI reported. The reason given was that SBV kept the central exchange rate higher than the buying rate of commercial banks, and were also the massive trade surplus and the continuous inflow of investment capital. The exchange rate can stabilise in the next time thanks to the highest ever foreign exchange reserves, estimated at $70 billion and several other items.
Dong was stable in value in the context of sharp fluctuations in other currencies. Although it was a positive point, many experts were concerned because the international trade flow was highly dependent on the value of the coins. A relatively strong currency would hinder exports. It was especially worrier when the world’s factory continuously devalues the Chinese Yuan which forecasted to continue soon.
Recently, in the seminar on the US-China trade war, Pham Sy Thanh, director of VEPR’s Chinese Economic Studies Programme (VCES), said that until then, exchange rate fluctuations between the US dollar and the Chinese Yuan did not have a significant impact on the VND/USD exchange rate. However, the exchange rate was a currently highly-concerned issue in the US-China trade war.
According to Truong Dinh Tuyen, former minister of Trade, the falling of the Chinese yuan would lead to cheaper Chinese exporting goods. Vietnam would be an export market for low technology and products redundant in China. If it was not handled well, inflation would increase which would reduce the value of the local currency and threaten macroeconomic stability.
