Behind the SBV rate adjustments

Higher exchange rate

In a press release on June 28, the central bank said the 1% exchange rate hike is part of its plan to ensure the value of the Vietnam Dong, improve international payments and increase foreign currency reserves.

It said that despite the international financial fluctuations since 2012, the exchange rate and foreign currency market in Vietnam have been kept under control, enabling the bank to purchase foreign currencies for national reserves, helping to reduce the hoarding of foreign currencies and the dollarisation of the economy.

It said the rate adjustment will reflect the supply and demand of foreign currencies in the market and create a firm and stable currency market.

Rate adjustments do not affect banking operations (Photo: cafeland)

Research Director of Capital Dragon Dr Le Anh Tuan said the adjustment is in line with the sharp depreciation of the currencies of emerging economies against the US dollar. Thailand’s Baht depreciated more than 10% and other currencies devalued between 4-10%.

Banking and finance expert Can Van Luc said credit organisations’ increasing demand for US dollars to purchase gold and the public psychology of converting Vietnam Dong into US dollars to deposit in banks has pressurised the central bank to raise the exchange rate.

The 1% adjustment is appropriate and is part of the SBV’s roadmap for raising the rate by 2-3% this year, Can said.

Banking expert Nguyen Tri Hieu said the central bank’s move is a measure to loosen its monetary policy. However, he forecasts that the depreciation of the Vietnam Dong might be the SBV’s own orientation rather than the result of mounting pressure from the market because imports have not put much pressure on the economy so far this year.

Former SBV governor Cao Sy Kiem agreed with the central bank’s decision, explaining that exports are showing signs of recovery, which is fuelling the demand for foreign currencies. In his opinion, the 1% adjustment will not significantly affect the market.

For an export-driven economy like Vietnam, the bank’s decision will help boost exports, stimulate purchasing power, generate more jobs and reinvigorate stagnant business production, Kiem said.

Lower interest rates

Similarly, the bank’s decision to lower deposit interest rates does not affect the market because many commercial banks have recently slashed their rates to below 7%.

Experts say the banks currently have large amounts of money in stock, and lower interest rates will not negatively impact their operations.

However, banking expert Nguyen Tri Hieu said whether the interest rate is cut or not is no longer a major business concern at the moment, citing that many businesses still cannot access bank loans. Therefore, he says a lower interest rate will not affect businesses very much.

Former SBV governor Kiem welcomed the decision to lower the interest rate, but said Vietnam’s lending rate is among the highest in the world, which makes it difficult for businesses to earn a profit.

He also welcomed the central bank’s decision to remove the ceiling deposit interest rate, helping narrow the gap between deposit and lending rates.

Once these moves prove to be effective, they will help save ailing businesses, said Kiem.