FED raise puts pressure on exchange rate

December 29, 2017 | 15:47

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Exchange rates were forecast to rise slightly in the coming years as the State Bank of Vietnam (SBV) fixed interest rates for mobilised deposits at 0 per cent, following the FED’s plan to raise the USD interest rate three times in 2018.

SBV has committed to sustain exchange rate stability

Shortly after FED announced the schedule to raise the US prime rate in 2018, the VND/USD exchange rate reached VND22,433 on December 22.

However, exchange rates offered by various Vietnam-based commercial banks remained on a downward trend in comparison to the beginning of the year.

In addition, according to the latest statistics provided by the World Bank, remittance inflows during the course of 2017 saw an increase of 16 per cent compared to 2016, setting a five-year record. By the end of 2017, foreign inward remittances were estimated to hit roughly $13.8 billion.

A recent report conducted by ANZ showed that with the impact of the heavy remittance flows and trade surplus, SBV was most likely to fulfill its commitment of keeping the exchange rate stable.

Nonetheless, the VND/USD exchange rate is expected to increase slightly in the following years, to VND22,900 by the end of 2018 and VND23,000 in June 2019 (currently, the rate is VND22,700).

Dr. Bui Quang Tin, a lecturer at Banking University of Ho Chi Minh City, explained that, “Pressure on the year-end exchange rate was inevitable because of export-import enterprises’ increasing demand for disbursement.”

Tin also added, “As the money market will likely stabilise by the end of the year, the interest rate will have a positive effect on the exchange rate. However, the FED increasing the USD interest rate will create certain pressures on the exchange rate.”

To date, the ceiling interest rate for mobilised USD deposits remained 0 per cent per year while monetary policies have not been adjusted since the FED changed interest rate.

Along with the stabilised money and foreign currency market, SBV recently purchased $8 billion, 12 per cent of which was mobilised. Meanwhile, throughout the period 2010-2015, this proportion climbed to around 19-22 per cent. Consequently, SBV stuck with the decision of maintaining the interest rate for mobilised USD deposits at 0 per cent.

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