Monday , February 6 2023

How Vietnam managed its currency policy in Q4


Central bank authorities worked hard in the last quarter of 2022 to keep interest rates and the dong stable amid global economic convolutions.

“It was a lot of work,” deputy governor of the State Bank of Vietnam (SBV) Dao Minh Tu repeatedly said Tuesday at the annual review meeting of the banking sector, referring to the impact of the Russia-Ukraine war which sent inflation soaring and caused central banks to hike rates.

In the first week of June only 3% of investors expected the U.S. Federal Reserve to hike interest rates by 0.75 percentage points, but the hike came just a few days later.

The American central bank continued to raise the rates in the following months to control inflation which had soared to a 40-year high.

The hikes pushed the U.S. Dollar Index, which measures the greenback’s strength against major currencies, to a two-decade high, forcing Vietnam to respond.

On September 22 the SBV raised its policy rates by 1 percentage point after keeping it unchanged for two years.

In mid-October it widened the dong-dollar trading band from 3% to 5% a day and let the Vietnamese currency depreciate against the dollar for a third time within a month.

This sent the dollar soaring to a record VND25,000 on the black market.

At the end of October the central bank again hiked its policy rates by 1 percentage point to the pre-pandemic level of 6% after keeping it at 4% for two years.

The hikes helped keep the currency stable, but slowed down credit flows.

With the stock and bond markets in trouble following a series of alleged frauds and arrests, businesses looked to banks for credit, but lenders had already nearly exhausted their full-year credit quotas.

The SBV was firm about keeping credit growth under 14% to control inflation.

Vietnam, as an open economy whose trade is 200% of GDP, faces a risk of importing inflation.

“The SBV has set a target to provide enough funding to the economy but cannot ignore inflation,” Pham Chi Quang, head of the central bank’s currency policy agency, said.

Tu said however that earlier this month the SBV increased the credit quota by another 1.5-2% points as economic indicators improved.

Inflation remains the key criterion for the central bank in making currency policy decisions next year, he added.

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