The State Bank of Vietnam’s (SBV’s) decision to cut interest rates by 25 basis points is surprising, given that growth appears to be holding up well at the moment, according to Capital Economics.
The London-based think tank stated in its Emerging Asia Economics Update last week that given the decent outlook for the economy, it did not think the Vietnamese central bank would rush into cutting rates again soon.
The SBV’s September 13 announcement that it would cut its benchmark refinancing rate from 6.25 percent to 6 percent from September 16 was unexpected, said the organisation.
The earlier consensus was that rates would be left unchanged not just until the end of this year but also throughout 2020. The last time the SBV cut rates was in July 2017 when it reduced the refinancing rate by 25 basis points, it added.
The statement on the central bank’s website gives little away. Other than noting that “the domestic macroeconomy has continued to be stable, the inflation has been controlled and the money and forex markets have developed stably,” the SBV said but made no mention of its next likely move.
Although the economy is expected to perform strongly in the coming quarters, weaker global demand is likely to drag on exports over the next few months. With the US-China trade war continuing, some investors have had to shift production to Vietnam to avoid tariffs, so the economy should continue to do well.
Capital Economics predicted the Vietnamese economy would grow by 7 percent both this year and next, which would make it one of the region’s best performing economies.
The rate cut should at least guard against some of the downside risks facing the economy. The precarious fiscal position is a concern, and tighter fiscal policy is likely to hit growth over the coming year.
According to the organisation, recent threats by US President Donald Trump to impose tariffs on imports from Vietnam unless more is done to reduce Vietnam’s bilateral trade surplus with the United States is a major concern.
It added that the central bank has little to worry about on the inflation front. The headline rate was just 2.3 percent year-on-year in August, which is low by historical standards.
Therefore, it expected inflation to remain subdued over the coming months. Inflation expectations remain well anchored, while transport price inflation should continue to drop back further into negative territory.
Vietnam’s central bank rarely changes its policy rate. The September 16 cut was only the second interest rate revision in five years. “Given this and the fact that the economy should continue to hold up fairly well over the next year or so, the most likely outcome is that interest rates will be left unchanged until at least the end of next year,” said Gareth Leather, senior Asia economist at Capital Economics.
