On October 18, the State Bank of Vietnam instructed commercial banks to cut lending rates for manufacturing and priority industries by 1.5 to 2 percentage points, and to reduce deposit rates for terms of six months or more by at least 0.5 percentage points, in an effort to support economic growth.
At the same time, the central bank stressed the need to strengthen the management of non-performing loans and to safeguard the sound operation of the banking system.
Far East Commentary
This targeted rate cut is a structural monetary policy arrangement rolled out by Vietnam to pursue its full-year GDP growth target of 10%.
The Vietnamese National Assembly set an ambitious economic growth target of 10% at the start of the year, and GDP grew 9.01% year-on-year in the first three quarters. To meet the full-year goal, fourth-quarter growth would need to accelerate significantly.
Amid a global environment of high interest rates, a direct cut to Vietnam's policy benchmark rate could intensify pressure on the dong to depreciate, on imported inflation and on capital outflows.
The central bank therefore opted for structural tools rather than an across-the-board rate cut, aiming to reduce financing costs for manufacturing in a targeted way, boost corporate capital expenditure and foreign investors' willingness to expand production, and consolidate the advantages of its export supply chain.
In addition, banking-sector risks warrant attention. Vietnam's credit growth has continued to outpace deposit growth, leaving the banking system exposed to maturity mismatches and liquidity pressure.
The simultaneous cut in medium- and long-term deposit rates may create deposit-gathering pressure for some banks with weaker deposit bases. On the other hand, credit expansion itself could lead to a deterioration in asset quality in the future, so banking-sector risks need to be closely monitored.
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