HSBC has reportedly said that a rate rise in Vietnam this year is unlikely on the back of broader challenges facing the local economy, according to local media.

Fitch Solutions, on the other hand, said last week it is expecting a cut to interest rates in Vietnam this year. It reaches this conclusion based on the belief that the 6 to 6.5 percent target for GDP growth for the year is unlikely and that inflation will stay around 4 percent. It says a rate cut will likely happen in July when it is believed the US Federal Reserve will start cutting rates.

These are both interesting calls in that Vietnam is currently spending its foreign currency reserves to keep the local currency ‘stable’ and these reserves are dangerously low. By some estimates around US$90 billion. This would put its reserves almost smack bang on the three months worth of imports recommended by the International Monetary Fund–the point being that there might not be another option other than to utilise interest rates to keep the dong ‘stable’.

For some background, the Vietnamese dong is on a managed peg. Each day the State Bank of Vietnam sets a base rate and financial institutions are permitted to trade the local currency up to 5 percent either side. Managing this peg, however, has proved challenging over the last year or two and this has at times led to erratic fluctuations in the currency. Interest rates, treasury bills, and forex reserves have all been in the mix to try to keep it under control and, in this context, it can be somewhat more challenging to predict exactly what the State Bank will do next.

For more information see: The Dong’s Wild Ride: Unpacked 2024