To better understand the potential impacts of this rate cut on Vietnam's economy and monetary policy, Saigon Investment sat down with Associate Professor Dr. Nguyễn Hữu Huân from the University of Economics, Ho Chi Minh City.
Journalist: - How do you evaluate the recent decision by the Fed to cut interest rates?
Dr. Nguyễn Hữu Huân: - The Fed’s decision to reduce interest rates by 0.5%, rather than the more conservative 0.25%, signals a clear shift from a tight to an accommodative monetary policy. This aggressive rate cut reflects the Fed's response to the growing risks of an economic recession in the U.S. and inflation nearing its target. While the move was expected, it nonetheless represents a strong commitment to fostering economic growth.
Importantly, this rate cut will have broader implications for the global economy. As the Fed eases monetary policy, consumer demand and investment in the U.S. are likely to increase, which could help bolster demand in the global market. Moreover, the Fed’s action gives other central banks around the world more room to lower their own interest rates, helping to stimulate domestic consumption and economic growth in their respective economies.
- How will this move specifically impact Vietnam, particularly in terms of monetary policy?
- This is undoubtedly positive news for Vietnam’s economy. Similar to other nations, Vietnam now has more space to maintain an accommodative monetary policy to support businesses and consumers. Specifically, we’ll face reduced pressure on the exchange rate and have more flexibility to keep interest rates low.
Before the Fed’s decision, the State Bank of Vietnam (SBV) had already taken preemptive measures. On September 16, 2024, the SBV reduced the interest rate on open market operations (OMO) loans from 4.25% to 4%, in response to cooling exchange rate pressures. This was the second time the SBV had lowered the OMO rate since mid-2024, with the first cut occurring in early August.
It’s worth noting that after the SBV cut the OMO rate to 4%, the USD/VND exchange rate initially rose again, highlighting the delicate trade-off between interest rates and exchange rate stability. However, with the Fed now reducing rates, that trade-off becomes less of a burden. The narrowing interest rate gap between the U.S. dollar and the Vietnamese đồng gives us more room to maintain lower domestic rates and continue with accommodative monetary policies.
Additionally, this year, the SBV has already used about $6 billion but has only repurchased a small portion—around $100-200 million. The Fed’s rate cut will provide an opportunity for Vietnam to increase its foreign reserves. If we see an influx of U.S. dollars into the economy, the SBV can start purchasing dollars to strengthen its foreign reserves. This process will further ease monetary policy as the SBV injects VND into the market through these purchases.
- Do you anticipate that the SBV will further reduce its policy rates in the near future?
- In Vietnam, the direct impact of changing policy rates is relatively limited, as it primarily affects market sentiment rather than having a broad market impact. The SBV’s policy rates primarily influence the operations of the "Big 4" banks (Vietcombank, VietinBank, Agribank, and BIDV), while smaller banks don’t access much refinancing or rediscounting.
Policy rates mainly affect OMO loans and treasury bill auctions. For now, the SBV only needs to intervene in the interbank market. If U.S. dollar rates drop in the interbank market, the SBV may consider lowering VND rates even further. But the impact will likely be more psychological than practical for the broader banking sector.
- With this room to ease monetary policy, can Vietnam’s economy fully absorb the potential benefits?
- The Fed’s rate cut provides room for the SBV to implement more accommodative monetary policies, but this doesn’t guarantee that Vietnam’s economy will immediately benefit. Businesses and consumers are still facing numerous challenges, and injecting more liquidity into the economy may not necessarily translate into stronger economic growth right away.
Monetary policy primarily addresses the supply side of the economy. For a real boost in growth, we need to focus on stimulating demand—this includes increasing domestic consumption, generating new orders for businesses, and implementing tax cuts, such as reducing special consumption taxes and personal income taxes. Fiscal policy will be more effective than monetary policy in this regard.
In addition, Vietnam should capitalize on opportunities in the export sector to take advantage of the global economic recovery. These two key drivers—domestic consumption and export growth—will be crucial for boosting credit demand and economic growth.
However, I want to emphasize that we shouldn’t pursue credit growth at any cost. While the target for annual credit growth is 15%, achieving a rate of 11-12% would be sufficient as long as we ensure that capital is directed toward productive sectors. In the long run, this approach will contribute to more stable and sustainable economic growth.
In the past, credit growth was often driven by the booming real estate market, which absorbed large amounts of capital. Back then, achieving economic growth rates of 6-6.5% required credit growth of around 14-15%. Today, however, the real estate market is more subdued, and credit is flowing into more productive sectors, which tend to be less capital-intensive. In other words, we don’t need as much capital to generate the same level of growth as we did during the real estate boom.
- Thank you for your valuable insights!
