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Vietnam should prepare for US Fed’s rising prime interest rate

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The US Federal Reserve may adjust the prime interest rate once more, according to Can Van Luc, chief economist of the Bank for Investment amp; Development of Vietnam (BIDV).

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The interest rate increase won't have big impacts on the economy

 

International mass media reports that the FED plans to lift the interest rate three times in 2018 to 2.1 percent per annum by the end of this year. The current interest rate is 1.25-1.5 percent.

However, Luc believes the FED is likely to adjust the interest rate four times instead of three.

He noted that the amount of money pumped into the US economy as a result of  Trump’s policies is relatively high in the context of price increases and the weak dollar. This could be why the US FED has raised the interest rates to curb the inflation rate at below 2 percent.

An analyst commented that the interest rate increase does not have a big impact on the global economy as it had in the past, because the adjustment is always programmed. 

However, Luc believes that if the FED raises the interest rates too rapidly, the move will cause certain shocks to the global financial market. 

In this case, monetary policy will be tightened, while liquidity in the world financial market will be affected and the US dollar interest rate will increase.

Interest rates and exchange rates are the most unpredictable variables in monetary policy management and macroeconomic stabilization in Vietnam. If the FED raises the interest rate one time more than expected, Vietnam will bear three impacts, according to BIDV's chief economist.

First, it will be difficult to slash interest rates. The government’s latest resolution has set the goal of slashing interest rates when the inflation rate is below 4 percent.

In 2017, the Vietnam dong deposit interest rates for long-term deposits were 6.4-7.2 percent on average. 

Preferential lending interest rates applied to some have decreased by 0.5-1 percent compared with the beginning of the year. However, the standard interest rates of commercial loans are still at 6.8-11 percent per annum.

Second, there would be pressure on cash flow. Money flow may be driven to new destinations that promise higher profits for acceptable risks.

Third, the dong/dollar exchange rate would be affected. The growth rates in developing countries are higher than in the US. This means that the currencies of developing economies are appreciating rapidly, while the US dollar is not likely to appreciate.

A report from the National Finance Supervision Council showed that the exchange rate was relatively stable in 2017, but the gap in dong and dollar interest rate was still about 6-7 percent.

 

 

Source: VietNamNet

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