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How will the US FED's interest rate hike affect the Vietnamese dong?

The Vietnamese dong may lose 4 percent of its value against the USD in 2022, while the deposit interest rate is predicted to lose 30-50 points after the US FED’s move and SBV’s first policy responses.

VNDirect Securities has released an updated macroeconomic report, predicting that pressure on the exchange rate increased after the US FED raised the prime interest rate for the fifth consecutive time this year and signaled that it would continue an aggressive monetary policy, and after SBV made the first responses to the FED’s move.

On September 22, Vietnam time, the US FED raised the interest rate by another 75 basis points to 3-3.25 percent.

Later, SBV announced the increases of operating interest rates. The refinancing interest rate has increased by 100 basis points to 5 percent per annum, and the re-discount interest rate by 100 basis points to 3.5 percent, commencing from September 23. 

The overnight interest rate has been raised from 4.2 to 6 percent per annum.

VNDirect Securities predicted that with the central bank’s move, the deposit interest rate may increase by another 30-50 basis points by the end of 2022.

It said that pressure on the exchange rate would increase, raising the predicted depreciation of the dong to 3.5-4 percent against the dollar in 2022.

The US FED this time showed a more hawkish view about monetary policy tightening. Its officials predicted that the prime interest rate may climb to 4.25-4.5 percent by the end of 2022 and 4.5-4.75 percent by the end of 2023.

The move promptly made the dollar appreciate and broke a 20-year peak in the international market at the September 22 trading session.

VNDirect Securities commented that the reaction by SBV is timely in the face of rapid changes in the international finance market.

However, the 100 basis point increase is surprisingly high compared with the 50 basis point increase predicted by VNDirect Securities for 2022. Therefore, the company thinks there will not be another interest rate hike this year.

Meanwhile, deposit interest rates are believed to increase by another 30-50 basis points by the end of the year. Commercial banks’ 12-month deposit interest rates are likely to rise to 6.1-6.3 percent on average.

The interest rate upward trend is believed to continue in 2023 and a 50 basis point increase is predicted for the year, which means that the 12-month deposit interest rate would rise to 6.6-6.8 percent on average by the end of 2023. 

However, the interest rate would still be lower than the 7 percent before the pandemic.

Manh Ha

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