Economic update – All about the FED
Economics Note 16/05/2022 47
- After twice hikes of 75 bps, another 175 bps of hikes are now reflected for the rest of the year, pushing the Fed rate at about 2.5% by end-2022.
- We see five major impacts of the Fed’s tightening of monetary policy on Vietnam’s economy.
- We expect SBV to maintain its accommodative monetary policy at least in the next 3-6 months to support the economic recovery
FED tightens monetary policy to deal with high inflation
At its most recent meeting held on May 3-4, 2022, the Federal Open Market Committee (FOMC) voted to increase the fed funds rate by 50 basis points to a target range between 0.75% and 1.0%. The decision to raise policy rates by 0.50% marked the most aggressive increase made in a single meeting since May 2000. The central bank officials also suggested that they will further raise policy rates throughout this year in an effort to tame inflation. According to CME Group survey, market expects Fed to raise the policy rate by 175-200 basis points for the rest of 2022 to a target level of 2.5% to 3.0%. Fed’s officials also agreed to begin reducing its balance sheet in June 2022, initially by US$47.5 bn per month (US$30bn in U.S. Treasuries and US$17.5bn in mortgage-backed securities), then by US$95bn per month after three months (US$60bn in U.S. Treasuries and US$35bn in mortgage-backed securities).
FED’s monetary policy has a broad impact on Vietnam’s economy
Tighter global financial conditions could dampen growth prospects for the global economy, leading to lower demand for Vietnam’s exports. Rising USD interest rates put pressure on Vietnam’s interest rates, whereby VND deposit rates are expected to increase further by 20-40 basis points for the rest of 2022. A stronger USD affects Vietnam’s exchange rate, although the impact is minimal as supportive factors for dong stability remain such as stronger trade surplus and high foreign exchange reserves. In addition, a stronger USD also increases the foreign debt repayment obligations of the Vietnam’s government and enterprises.
SBV is likely stick to its own pace with more attention to domestic recovery
We keep our expectation that the State Bank of Vietnam (SBV) will maintain its accommodative monetary policy until at least the end-2Q22 as (1) Although inflationary pressures are expected to intensify in the coming months, the average consumer price index for 1H22F is forecasted at 2.5% yoy, still well below the government’s target of 4% yoy (2) Domestic demand remains weak and has not yet fully recovered to pre-pandemic levels and (3) The SBV still prioritizes the goal of maintaining low lending interest rates to support businesses. Any monetary tightening will only take place in the second half of 2022 (more likely in 4Q22F), and major rate hikes will be limited, around 0.25-0.5%
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