Exchange rate emerges as new challenge for the economy

Fluctuating exchange rate

Since the beginning of the year, the exchange rate has increased by more than 3%. Compared to other currencies in the region, the VND has depreciated by 6%, the Baht (Thailand) by 5.3%, the Ringgit (Malaysia) by 6.5%... Thus, the Central Banks of some neighboring countries have proactively made their domestic currencies weaker in the context of a stronger USD.

Exchange rate is one of three factors in the “Impossible Trinity”. If the exchange rate continues to rise, analysts predict that the State Bank may have to stop reducing interest rates, or even consider adjusting them up again to control the exchange rate. If this scenario occurs, businesses will have to bear higher interest costs. Exchange rate is also part of the financial costs of businesses.

The DXY index is forecast to increase above 110 points in 2024. The Fed forecasts another 25 basis points increase in the last months of 2023 and interest rates may cool down from the third quarter of 2024.

Domestically, the State Bank has had 10 net withdrawal sessions through the issuance of treasury bills with a total value of VND110,700 billion. Interbank interest rates are gradually increasing.

“If interest rates decrease, the exchange rate will naturally increase, that is from an economic perspective. Therefore, management must be harmonious and stable, which is the task of the State Bank,” said State Bank Governor Nguyen Thi Hong at a meeting with businesses.

Experts from the World Bank (WB) assessed that the continued loosening of monetary policy is considered appropriate for the economic context of Vietnam. However, continued interest rate cuts will increase the interest rate differential with global markets, potentially putting pressure on the exchange rate.

Will the policy reverse?

Mr. Do Hiep Hoa - Investment Director of MB Capital - said: "There is no policy reversal yet. The move to absorb net treasury bills in the interbank market is a cautious and skillful move by the State Bank to absorb excess liquidity in the interbank market to avoid exchange rate speculation. The recent move by the State Bank has only had a limited impact in the interbank sector."

According to experts, in the context of excess liquidity, the overnight interbank interest rate of VND has been pushed to nearly 0%/year, nearly 5%/year lower than the USD interest rate. The increasing interest rate gap between VND and USD has led to foreign currency speculation in the system, putting pressure on the exchange rate.

Therefore, the withdrawal of money by the State Bank will help raise the VND interest rate level in the interbank market, while narrowing the gap with USD interest rates, thereby reducing foreign currency speculation and reducing pressure on the exchange rate.

Agreeing with the above view, Associate Professor Dr. Pham The Anh - Head of the Faculty of Economics, National Economics University - said: "I think we should not panic about the upcoming reversal of monetary policy. I think that the regulatory agencies will not immediately reverse monetary policy. Currently, the domestic economy is still relatively difficult, aggregate demand is still weak, so the State Bank will try to keep interest rates low as long as possible to support growth."

According to Associate Professor Dr. Pham The Anh, the highest goal of monetary policy is to stabilize prices and stabilize the value of the domestic currency. The Government is pursuing a growth target. Currently, Vietnam's economic growth is still low compared to the set target, so the Government will try to achieve higher growth. Therefore, in addition to fiscal policy, it is necessary to maintain a favorable monetary policy for businesses. The State Bank is trying to control inflation and in fact, core inflation is on a downward trend.

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