Vietnam raises key rates by 100 basis points as dong slumps

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VIETNAM'S central bank unexpectedly raised interest rates by another 1 percentage point for a second straight month to help ease pressure on a currency that has slumped to a record low.

The refinance rate will rise to 6 per cent while the discount rate will increase to 4.5 per cent, starting Oct 25, the State Bank of Vietnam (SBV) said in a statement late on Monday (Oct 24). The central bank also raised the cap on the dong deposit rate for one-to-less than six-month tenure to 6 per cent and increased the interbank overnight lending rate to 7 per cent.

The move was done "to help restrain inflation, stabilise the dong and maintain stable macroeconomy, and ensure the banking system's operational safety", according to the SBV statement. The central bank also pledged "to intervene in the foreign currency market" to meet the dollar requirements of banks and keep the money market stable.

The steep rate hike, coming a week after the dong's trading band was widened, indicates the challenges confronting Asian central banks that are under pressure to cushion their currencies and limit imported inflation while trying to preserve their dollar stockpile. Aggressive Federal Reserve tightening has put pressure on currencies globally, including the dong.

The dong, which dropped to a record low of 24,842 against the dollar on Monday, traded at 24,858 as of 10.00 am local time. The currency plunged 2.3 per cent last week, its biggest weekly loss since February 2011, according to data from banks compiled by Bloomberg.

"Vietnam has been also slow in reacting to the high-interest rates in the US and the rise of global inflation - thus it has led to huge pressure on the local currency," said Nguyen Anh Duc, head of institutional sales at SSI Securities.

The successive rate hikes have brought the refinance rate to pre-pandemic levels and adds "another headwind" for the markets in Vietnam, on top of the "ongoing issues in the real estate sector and an anticipated slowdown in export growth in 2023", said Ruchir Desai, a fund manager at Asia Frontier Capital.

This month's rate hike and widening of the trading band may help ease the pressure off Vietnam's currency reserves. Malayan Banking last week estimated that the SBV already spent US$23 billion of its reserves, with the stockpile potentially sliding to less than US$90 billion, which was equivalent to only three months worth of imports.

"We expect the tightening cycle is coming to a close soon with maybe one more rate hike as economic growth is likely to soften," Trinh Nguyen, a senior economist at Natixis in Hong Kong, said. The rate hike isn't surprising as the SBV is less willing to use reserves to defend the currency and that monetary policy will be "more front and centre", she said. BLOOMBERG

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