Vietnam cuts interest rates again as economic growth slows.

HANOI: Vietnam's central bank announced on Tuesday it will cut its refinance rate by another 50 basis points to 5.0 percent to prop up the slowing economy.

The central bank, formally known as the State Bank of Vietnam (SBV), will also cut the overnight electronic interbank rate to 5.5 percent from 6.0 percent while keeping the key discount rate at 3.5 percent, it said in a statement.

The moves, effective from Thursday, are the central bank's third round of cuts since mid-March when it became one of the few central banks to buck the global monetary tightening cycle, in a bid to support growth.

The Southeast Asian country is trying to avert a slowdown in growth from weak demand in its key markets after first-quarter gross domestic product (GDP) expansion slowed to 3.3 percent from 5.9 percent in the fourth quarter of last year.

Vietnam's exports in the first four months of this year fell 13.0 percent from a year earlier, while its imports plunged 17.7 percent. A sharp decline in imports could indicate a further slowdown ahead in industrial production, as businesses reduce their procurement of raw materials and equipment.

The fresh rate cuts are "aimed at lowering the interest rate levels to help businesses and households have better access to credit," the SBV said in the statement.

The central bank said inflation in Vietnam is under control while banks' liquidity is abundant, facilitating its move to cut the rates.

April consumer prices rose 2.81 percent from a year earlier. The government is targeting average inflation of 4.5 percent for the year.

The central bank last cut its refinance rate to 5.5 percent from 6.0 percent on April 3, and its discount rate to 3.5 percent from 4.5 percent on March 15.

With the latest move, both the refinance rate and the overnight rate will have been cut twice since March.

Cutting the refinance rate lowers lenders' costs to obtain short-term loans from the central bank, thus supporting their lending to struggling firms.

Lower global demand for goods manufactured in Vietnam, regulatory reforms, and a wide anti-corruption crackdown have contributed to tighter credit for firms, especially in the real estate sector.

The central bank earlier this month had hinted at the fresh rate cuts.

Vietnam targets economic growth of 6.5 percent this year, slower than an expansion of 8.02 percent last year.

On Monday, Deputy Prime Minister Le Minh Khai said the manufacturing-led economy will continue to face unfavourable external conditions this year, citing weak global demand and geopolitical uncertainty.

The article highlights the decline in economic growth in Vietnam, as indicated by the slowdown in gross domestic product (GDP) expansion which has been attributed to 'a sharp decline' in exports and imports. To support their macroeconomic policy of economic growth, the SBV intervened in the market through its third round of interest rate cuts since mid-March as part of an expansionary monetary policy aimed at increasing consumer spending and investments. Changing interest rates is a key component of monetary policy, which the central bank employs to increase the supply of money. This intervention by the SBV was designed to stimulate economic growth in Vietnam by enhancing credit accessibility for businesses and households and boosting economic activity amid weak demand and external challenges.

In Figure 1, the shift from D1 to D2 represents the GDP expansion of \(5.9\%\) in the fourth quarter of last year while the shift from D2 to D3 represents the slowdown in GDP expansion to \(3.3\%\) in the first quarter of the new year. The slowdown in \(GDP\) was due to the decline in imports which is one of the four components of GDP. The decrease in imports by \(17.7\%\) and exports by \(13.0\%\) suggests a potential slowdown in industrial production, 'as businesses reduce their procurement of raw materials and equipment'. This reduced demand for Vietnamese goods can result in decreased revenue and profits for exporting firms, potentially leading to job cuts and stagnant or declining wages. This, in turn, can lower consumer spending due to reduced disposable income.

As a result, the SBV aims to intervene by increasing the other components of GDP, consumer spending and investments. This intervention involves a series of rate cuts, including reductions in the refinance rate and discount rate. In Figure 2, the money supply curve shifts rightward three times from Y1 to Y4, this represents three rounds of rate cuts since mid-March. Now, the rates have shifted to P4 where the new refinance rate is \(5.0\%\) and the discount rate remains at \(3.5\%\). By lowering these rates, the SBV intends to enhance access to credit for businesses and households and aim to reduce lending costs for banks, which can then extend more favourable lending terms to struggling firms. This may lead to increased demand for loans as businesses and individuals find their existing debt obligations more manageable. However, for businesses involved in export-oriented industries facing structural and market-related challenges lower borrowing costs might resolve their issue and may still struggle with reduced demand for their products in overseas markets.

In the short run, these policies will stimulate economic activity and mitigate immediate slowdown. When borrowing costs are reduced, businesses and households are incentivized to take on new projects, make capital investments, and increase spending on goods and services as they feel more confident. However, given that this marks their third consecutive reduction in interest rates over three months, it's likely that consumers will start to anticipate further cuts in the future. As a result, individuals might delay their investments and purchases with the expectation of more favourable conditions. This can lead to a short-term decline in economic growth and undermine the intended stimulative impact of interest rate cuts.

Nevertheless, without the intervention of the SBV, the economic slowdown could continue. For Vietnam, which relies on exports as a significant driver of economic growth, a decline in exports can have a substantial impact on its overall economic health. The Deputy Prime Minister highlights two key external challenges in the export market: weak global demand and geopolitical uncertainty. These external factors are beyond the control of Vietnam's central bank and government, emphasizing the importance of domestic measures like interest rate cuts to mitigate the negative impacts of these global conditions.

In the long run, sustained rate cuts could contribute to increased investment and productivity, potentially leading to the development of new industries and a more diversified economy less reliant on exports. Additionally, with April's consumer prices rising only by \(2.8\%\), below the government's inflation target of 4.5%, there's room to use interest rate cuts to stimulate growth without immediate inflation concerns. Moreover, the ample liquidity in banks allows them to meet the increased demand for loans resulting from lower interest rates. However, while current conditions allow for interest rate cuts, it can lead to inflation if the productive capacity doesn't keep up, eroding economic stability in the long run.

It can be concluded that this intervention was appropriate to facilitate Vietnam's shift towards inward-led growth which would be more effective in supporting growth momentum as the 'manufacturing-led economy will continue to face unfavourable external conditions'. However, the SBV should intervene when AD increases excessively from interest rate cuts to support other macroeconomic objectives like a low and stable rate of inflation.