FLASH NEWS 14/02/2021 – FED raise its benchmark federal-funds rate by a quarter percentage point

Federal Reserve officials voted to raise interest rates by a quarter percentage point and signaled six more rate hikes toward yearend to combat inflation, which remained high (+7.9% YoY in Feb 2022). In addition, according to Mr. Powell, FED ended asset-purchase stimulus program last week and could finalize a plan to shrink its USD9tn asset portfolio at its next meeting on May 3rd-4th (start Quantitative Tightening program), and to implement it in June 2022.  And if inflation does not decline by mid-2022, we expected that FED is likely to have more interest rate hikes toward yearend 2022 in conjunction with accelerate its QT program.

We remained our view that our monetary policy management of the State Bank of Vietnam will have no impact in 2022, which remain expansionary in order to support the socio-economic recovery and development program after the impact of the COVID-19 pandemic, on over FED rate hikes if:

(1) The FED will only increase interest rate with total increase reach as high as 2% but FED will not start their Quantitative Tightening up until June 2022 (which withdraw money from the system);

(2)  As long as Vietnam’s inflation rate under controlled and stay within 4%, our monetary policy tends to continue to be expansionary for supporting the economic recovery;

(3) The main impact of FED rate hikes is mainly on foreign capital flows. In short-term, with the history of others FED rate hikes, portfolio capital flows into emerging markets will turn negative and Vietnam could see continued net selling on the equity markets. Despite short term fluctuations, Vietnam, with good macroeconomic fundamental and as long as inflation stay below 4%, will continue to be an investment destination for FDI companies, especially in the manufacturing industry; and

(4) Exports, which are one of the country’s key economic growth drivers, will remained strong as manufacturing activities gradually recovered and is expected to continue its upward trajectory given the recovery of the global economy and a long list of Free Trade Agreements (FTAs) achieved to date such as EVFTA, UKVFTA, CPTPP.

Despite the FED rate hike, we expect the VND in general (in banking system and in black market) will maintain its strength in upcoming months of 2022 supported by:

(1) Exports, as noted above are expected to remain strong;

(2) FDI inflows disbursement recovered recently and FDI inflows registered to Vietnam is expected to continue to after we control the outbreak of COVID-19 cases across country and reopen our economy, especially the manufacturing sector, given our long list of Free Trade Agreements (FTAs) achieved up to now; and

(3) Abundant foreign reserves (stood at around USD111bn at the end of September 2021).