Vietnam: Central Bank hikes rates by 100 basis points for a second consecutive meeting in October
October 24, 2022
On 24 October, the State Bank of Vietnam (SBV) increased a host of interest rates, including hiking the refinancing rate from 5.00% to 6.00%. It was the second consecutive 100 basis points hike and the second hike since 2011.
The move came amid the need to support the currency as the Vietnamese dong continued to depreciate in October to record lows. The rate increase followed the SVB’s decision to widen the dong’s trading band from 3.0% to 5.0% in October, in order to tolerate greater FX volatility and protect international reserves. Rising inflation, which was above the government’s 4.0% target in October, was also a factor behind the hike.
Looking ahead, the SBV is likely to continue tightening into 2023, in line with the global monetary tightening cycle. Two rate hikes in quick succession strengthen the idea that going forward, the Central Bank is likely to put more focus on interest rate hikes versus open market operations in a bid to protect its international reserves.
On the decision and the outlook, JPMorgan analysts commented:
“The main issue is around addressing temporarily FX pressures rather than high domestic inflation and a positive output gap. By hiking, SBV has revealed a preference to preserve its FX reserves through a combination of rate hikes and widening the trading band. The task ahead is to strike a fine balance between rate moves and FX stability. As such, we expect the central bank to deliver additional hikes if the currency falls too rapidly.”