Central bank to cut refinance rate in next quarter: UOB

“With the US Fed poised to end its rate hike cycle as soon as May 2023 and that domestic inflation rates are showing some tentative signs of turning, we anticipate that the SBV will cut its refinance rate sometime in the second quarter this year by 100bps to 5.00%,” UOB’s report emphasised.

According to the bank's newly-released report on global economic outlook, that could be a one-off move, and more rate cuts may be on tap if domestic price pressures ease off further, although this is highly uncertain for now.

Illustrative photo - Photo: VNA

From September to November last year, the SBV embarked on a flurry of policy moves given aggressive US Fed interest rate hikes, USD strength, and inflation pressures. It then unexpectedly raised its key interest rates by 100 basis points on 22 September, followed by another round of 100 bps hike a month later on 24 October.

The SBV on 17 October announced the widening of the USD/VND trading bands to /-5% from /-3% to allow for greater flexibility for the VND given a strong USD.

On 16 March this year, the SBV unexpectedly lowered its discount rate by 100bps to 3.5% from 4.5% in an attempt to boost economic growth amid global uncertainties. The US and European banking sectors are mired in a crisis of confidence. The SBV also reduced the overnight lending rate in the interbank market by 100bps to 6% and trimmed the cap on the lending interest rates for short-term loans in some sectors to 5% from 5.5%.

According to the UOB, the most important part of the latest policy move was that the SBV left the refinancing rate unchanged at 6%. This signals that the policy stance remains unchanged despite cuts in other interest rates.

As the SBV balances economic growth while ensuring price stability, there will be an increasing bias to shift towards a more accommodating stance ahead.

Experts from UOB forecast Vietnam’s GDP growth will reach 6.6% this year in line with the target of 6.5% by the government.

This takes into account the first quarter growth momentum to pick up slightly at 6.45% year over year, largely due to the low base in 2022.

According to the bank, several external risks continue to weigh on its outlook including the Russia-Ukraine conflict and its impact on energy, food, and commodity prices; global supply chain shifts and disruptions; global monetary policy tightening; and the developments in the global banking sector with its impact on confidence.

Consumer prices are showing tentative signs of turning around, however it is still early to tell whether the trend is sustainable. Of concern is that core inflation remains well above the overall target, which will be a key consideration for the central bank, the bank suggested.