Economic Analysis - Additional Rate Cuts Could Lead To Macro Instability - DEC 2017

BMI View: We expect the SBV to remain on hold through 2018, although risks are weighted to the downside amid a manageable inflation environment and calls by the Prime Minister for faster credit growth. Further rate cuts would likely pose downside risks to macroecono mic stability over the medium term .

We expect the State Bank of Vietnam (SBV) to maintain its benchmark annual refinancing rate and discount rate at 6.25% and 4.25%, respectively, through end-2018. On one hand, the SBV could cut interest rates further given that the current inflation environment remains manageable, and the Prime Minister is calling for credit growth to be accelerated (from the previous target of 18% to 21%) in order to achieve the economic growth target of 6.7% in 2017 and 6.4-6.8% in 2018. On the other hand, the sharp acceleration in real GDP growth in Q317 has likely reduced pressure on the central bank to ease monetary policy further to support growth, while we believe that interest rates in Vietnam are already sufficiently low. Any additional rate cuts is likely to have a limited impact on stimulating growth, and would instead put the economy at risk of overheating, encourage more speculative investment, and make the Vietnam dong vulnerable to a renewed US interest rate hiking cycle.

Robust Q3 Growth Print Likely Eased Pressure For Further Rate Cuts

Interest Rates At 10-Year Low
Vietnam - Central Bank Policy Rate, %

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