Expectations of rate cut ahead of Fed meeting

In a report published by Yuanta Research on September 12, experts predict that the Fed's upcoming decision will prompt the State Bank of Vietnam (SBV) to prioritise providing liquidity support to the market. This will enhance the financial system’s liquidity and help reduce the cost of capital for banks.

"Previously, the market anticipated that the SBV might raise its policy rates due to exchange rate pressures earlier this year. However, with the Fed signalling a policy shift in September, this pressure has started to ease, and the SBV is now expected to pursue more accommodative monetary policy through open market operations," the report stated.

Speaking with VIR, Duong Kim Anh, investment director at Vietcombank Fund Management, confirmed the high chance of the Fed cutting rates in September. However, the key question remains whether the cut will be 25 or 50 basis points.

"A rate cut by the Fed will most significantly impact the exchange rate, alleviating pressure on the VND. This is one of the critical factors that would allow the SBV to maintain low-interest rates, thereby supporting the economy. In the long run, a stronger US economy and growing consumption would benefit Vietnam’s export sector, one of the primary drivers of its economic growth," Kim Anh said.

Although there is no direct correlation between the Fed’s policy rates and Vietnam’s deposit rates or government bond yields, Kim Anh noted that the Fed's actions have an indirect influence, primarily through foreign exchange mechanisms related to exchange rates.

"The strengthening of the VND also has psychological elements. The speculative holding of foreign currency, when the dollar weakens, has diminished, reducing pressure on the VND. With less pressure on interest rates, the SBV has adjusted the open market operations rate in the interbank market," Kim Anh added.

Vietnam may maintain its accommodative monetary policy in the short term to support economic recovery. However, the SBV must closely monitor inflation trends, foreign capital flows, and the global economic situation.

"If the Fed cuts rates, the impact on Vietnam will unfold across various aspects, particularly regarding capital inflows, exchange rates, and domestic interest rates. Lower rates in the US may lead to capital seeking higher returns in emerging markets like Vietnam, potentially boosting foreign investment," said Nguyen Quang Huy, head of the Finance-Banking Department at Nguyen Trai University.

"The SBV may continue or maintain its accommodative monetary policy in the short term, especially as the need to support post Covid-19 economic recovery remains strong. Lower interest rates in the US provide room for the SBV to keep rates low without worrying excessively about capital flight," he added.

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