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Vietnam Monetary Policy June 2023

Vietnam: Central Bank slashes benchmark refinancing rate by another 50 basis points in June

On 16 June, the State Bank of Vietnam (SBV) cut the benchmark refinancing rate from 5.00% to 4.50%. The move followed the Central Bank’s decision to cut the benchmark refinancing rate by 50 basis points in late May. At the same time, the Central Bank decided to lower the overnight lending rate in the inter-bank market from 5.50% to 5.00%, as well as the discount rate from 3.50% to 3.00%. Moreover, the Bank modified the interest rate caps for both deposit and credit operations in the banking sector in a bid to stimulate the flow of capital toward priority sectors.

The ongoing weakness of the manufacturing sector at a time of weakening global demand was behind the Bank’s decision to continue easing its policy. Moreover, authorities see risks that the country might miss this year’s growth target of 6.5%. These expectations, coupled with the assessment that inflationary pressures have been kept in check in recent months, provided additional leeway for the Bank to stimulate the economy.

In its communique, the Bank highlighted that cuts were aimed at enhancing households’ and businesses’ access to capital, which will contribute to a recovery in production in turn. That said, the possibility of higher risk aversion in global markets and volatile oil prices could limit the amount of policy easing that the Bank can implement. The key factors to watch remain China’s recovery and the evolution of U.S. interest rates. The Consensus is for more rate cuts ahead.

On the outlook, analysts at the EIU commented:

“Policy easing will be aimed at alleviating an ongoing credit crunch in the property sector, where many firms are facing repayment and refinancing difficulties, leading to increased risk of bad debts in the banking sector. The SBV’s move to encourage commercial banks to restructure loan repayments and allow them to purchase corporate bonds will help to contain loan and bond defaults.”

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