Experts say the State Bank of Vietnam (SBV) is expected to cut interest rates further to rates seen during the pandemic. However, the effectiveness of the cut is unclear.

The central bank on June 19, 2023 once again cut operating interest rates by 50 percentage points, for the fourth time within four months. The rediscount interest rate was lowered from 4.5 percent to 3 percent; the refinancing interest rate from 6 percent to 4.5 percent; and the overnight interbank interest rate from 7 percent to 5 percent.

Meanwhile, HSBC, in its report released June 19, 2023 predicted that SBV would carry out another interest rate cut of 50 base points, possibly in the third quarter, in order to support economic growth.

According to HSBC, the decision by SBV to slash interest rates reflects the urgency needed to support economic growth via a credit channel. The move aims to reduce costs for financing enterprises and business households, encouraging the business environment and supporting consumers.

HSBC believes that 2023 will be a tough year for Vietnam’s economy after witnessing a  GDP growth rate falling significantly to 3.3 percent in comparison with the same period last year.

It pointed out that negative external factors remain high risks for Vietnam’s economic growth. Exports have decreased by 10 percent this year compared with the same period last year. Exports to the US, the biggest export market in Vietnam, have decreased by 20 percent.

As for HSBC’s prediction about interest rate cuts, Vicente Nguyen, chief investment officer (CIO) of AFC Vietnam Fund, said the move, if taken by SBV, would be good for the economy. However, experts believe that it would be more effective if the interest rate is applied together with other measures.

Bui Van Huy, HCM City Branch director of DSC Securities, said the move showed the state’s close attention, but the effectiveness remains unclear.

Huy stressed that interest rates had been adjusted three times before the latest on June 19, but the adjustments have not had a considerable impact on the economy. He said that more time is needed for the monetary policy to have an effect.

Fiscal policy

Huy cited the concept of the “liquidity trap”, the phenomenon that occurs when monetary policy is loosened by lowering interest rates excessively to below a certain level, which then prompts people to keep their assets in cash, and monetary policy then becomes powerless. When this happens, the regulation of the economic cycle must depend on fiscal policy.

A typical example of the liquidity trap is Japan’s Lost Decade in the 1990s to after 2000. The country had to slash interest rates from 6 percent to nearly zero percent, but the economy still sank in recession.

In the case of Vietnam, according to Huy, solving the disruption in the markets and the acceleration of fiscal policy (public investment) is expected to have a bigger effect than the monetary policy at this time.

Tran Thi Khanh Hien from VNDirect Securities, said the best solution now is stepping up public investment and accelerating disbursement for some projects, such as the Long Thanh International Airport.

International institutions, despite warning of difficulties for Vietnam’s economy, have given positive predictions about the economy in the medium- and long term.

S&P Global Market Intelligence said Vietnam would be one of the fastest growing emerging markets in Asia in the next five years thanks to strong foreign direct investment (FDI), big expenditures on infrastructure, and benefits from the US-China trade conflict, as well as many Free Trade Agreements (FTAs).

Viet Nam Net