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Thursday, October 28, 2021

Vietnam cuts interest rates again, further easing likely: Oxford Economics

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HCMC – The State Bank of Vietnam cut its main policy rate by 50 basis points to 4.5% earlier this week, and further rate cuts are likely given the poor economic outlook, though Vietnam is currently better placed for a rebound than several other countries, according to Oxford Economics.

Gareth Leather, Senior Asia Economist at the London-based think tank, noted in a statement that the cut to the refinancing rate takes it to the lowest rate on record and marks the second rate cut since the start of the year.

“The refinancing rate was reduced by 100 basis points in March. Although the meeting was unscheduled, we had predicted the central bank would cut rates again this year,” remarked Leather.

He pointed out that having successfully contained the virus at home, Vietnam is better placed than others to get through the current crisis.

So far, Vietnam has recorded 314 cases of Covid-19, the respiratory disease caused by the novel coronavirus. Without a single death, at least 260 patients have recovered from the disease.

Despite the positive outcomes, the economist warned that recovery is likely to be slow. “While the lockdown was lifted at the end of April, the latest daily data we track appear to show that economic life in Vietnam is only slowly returning to normal,” he said.

He cited Google’s Community Mobility Reports, stating that attendance at retail and recreational events is still down 30% from pre-crisis levels.

The biggest drag, however, will come from the export sector, according to the economist.

Having held up well in the first quarter of the year, exports from Vietnam fell by 60% year-on-year in April, which is much steeper than the falls recorded during the depths of the global financial crisis, he stressed.

With exports equivalent to some 80% of the country’s gross domestic product (GDP), Vietnam is one of the most trade dependent economies in the region.

Overall, Oxford Economics forecast the country’s GDP would grow by a mere 0.5% this year, down from 7% in 2019. While this would make Vietnam the region’s best performing economy in 2020, it would still be the worst performance since 1980.

The U.K. think tank’s forecast is well below the International Monetary Fund’s expectations, at 2.7%, and the Vietnamese Government’s own target of 5%.

“The central bank has little to worry about on the inflation front,” noted Leather.

Having peaked at 6.4% year-on-year in January, the headline inflation fell to just 2.9% year-on-year in April – its lowest rate in six months, he explained.

With weak growth and lower oil prices putting downward pressure on prices, he projected inflation should continue to weaken over the coming months.

“Putting all this together, we think the central bank will cut its main policy rate by a further 100 basis points over the coming months,” he said.

By Gia Phong

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