Fed interest rate hike does not affect VND

On December 19, at the Fourth Federal Open Market Committee (FOMC) meeting in 2018, the Federal Reserve (Fed) has officially raised the range of its benchmark interest rate by a quarter of a percentage point to between 2.25 and 2.5 per cent.

The reason for the Fed to increase interest rates for the fourth time mainly comes down to the US’ current economic situation, with its stock market on a steep downward slope and core inflation rate showing signs of decrease, and aims to gradually cool down the economy and encourage growth.

"The odds are that the Fed can pull off a soft landing for the economy," said Ryan Sweet, head of monetary policy research at Moody's Analytics.

In the Vietnamese foreign exchange market, after the Fed’s interest rate hike, the central exchange rate was set by the State Bank of Vietnam (SBV) at VND22,785/USD, unchanged compared to the previous session on December 20. The VND/USD exchange rate in commercial banks even dropped sharply compared to before the Fed’s official announcement.

The US dollar value on the international market went slightly down despite the rise in US interest rates. The US Dollar Index (DXY), tracking the strength of the US dollar against a basket of major currencies, plunged from 96.97 points on December 19 to 96.39 on December 20, and stays at 96.95 on December 21.

The current devaluation of the greenback is attributed to the fact that the Fed’s increasing interest rates is absolutely in line with market sentiments as well as clear signals from members of FOMC, while the plan to increase interest rates in 2019 is not up to the majority’s expectations.

The Fed is planning fewer hikes in the next two years

Talking about the impact of the Fed hike on the Vietnamese currency, Ngo Dang Khoa, country head of global markets at HSBC Vietnam, said “The domestic financial market will not suffer any sudden change because of the Fed’s latest move as it is expected. Moreover, recently, the SBV has taken flexible policy measures on both the exchange rate and interest rates to stabilise the market.”

In fact, in 2018, the VND is one of the currencies that best withstood the Fed's hikes. Vietnam is also the only country in Southeast Asia that did not have to raise its benchmark interest rates in 2018. To keep the VND from strong depreciation, the SBV has withdrawn liquidity from the system, which created a shortage of the VND, thereby, protecting its value.

Along with raising interest rates, the Fed also informed that it would trim down the expected number of times to increase interest rates in 2019 from three times to two, and only once in 2020.

In his explanation for the reduction in the frequency of increasing interest rates, Can Van Luc, chief economist of Joint Stock Commercial Bank for Investment and Development of Vietnam (BIDV), said that the first reason comes down to the global economic and political context. At present, many central banks around the world are raising interest rates, which pushes up the international interest rate level and constricts global financial liquidity.

Secondly, in the US, the effect of the stimulus package that Trump pumped out in 2018 would be reduced in the next two years. Thirdly, considering that the world economic growth in 2019-2020 is forecasted to be lower than in this year, it is necessary to slow down the speed of rising interest rates.

Economist Nguyen Tri Hieu noted that, “Rising interest rates is a sign of tight monetary policy. The US may not adopt this tight monetary policy next year, which would slow the momentum of the growth of the US economy as the US is now negatively affected by the trade war. If the Fed reduces the frequency of interest rate hikes, there would be a positive impact on the exchange rate in Vietnam as it reduces the pressure on the VND.”

Nevertheless, overall, the USD in 2019 is predicted to continue to be stronger, along with the volatility of the CNY, there is still considerable pressure on the VND that requires flexible measures to ensure the economic growth and macro stability, according to Khoa.