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Vietnam interest rate rise: Benign SBV may be forced to act if inflation rises, dong plummets

By Fitri Wulandari

Edited by Jekaterina Drozdovica

15:16, 28 September 2022

Banknotes of Vietnamese dong
Benign SBV may be forced to act if inflation rises, dong plummets. – Photo: Shutterstock; CPM PHOTO

After leaving interest rates unchanged from 2020, the State Bank of Vietnam (SBV) surprised the market with a jumbo hike of 100 basis points (bps) to shore up its currency, the Vietnamese dong. 

The Vietnam interest rate rise on 22 September was SBV's first response to the US Federal Reserve’s (Fed) aggressive hikes, which have seen the US dollar (USD) strengthen against emerging countries’ currencies

With analysts projecting the Fed to continue monetary tightening until next year, will the Vietnam interest rate be able to catch up and close the rate differential? We examine its history and factors driving the bank’s policy in 2022 and beyond. 

About State Bank of Vietnam

The State Bank of Vietnam (SBV) is Vietnam’s central bank. It was founded as the Vietnam National Bank in February 1951, six years after the Southeast Asian country gained independence from France. 

The bank changed its name to the State Bank of Vietnam in 1961. During the Vietnam War (1955 to 1975), the Vietnam National Bank’s limited responsibilities included currency management and circulation, credit promotion for state-owned companies and foreign exchange management. It was not until 1988 that the SBV’s responsibilities expanded to implementing central bank tasks. 

Under the 2010 State Bank of Vietnam law, the SBV carries out monetary and banking activities, foreign exchange management, issues money, and provides monetary services for the government and other public services. 

SBV’s operations aim at stabilising the value of the dong, ensuring safe banking operations, as well as ensuring the safety of the national payment system. Within its monetary policy, the SBV aims to maintain an inflation target of 4%. 

Unlike central banks in developed countries, like the Fed, the SBV is not an independent body. It operates under government supervision. The Prime Minister and the SBV decide on monetary policy tools after the National Assembly,  the country's parliament, sets the annual inflation target based on the government proposal.

The bank’s main policy rates are the refinancing rate for short-term loans, the discount rate and the interbank lending rate.

SBV interest rate history

SBV increased its refinancing rate to an all-time high of 15% in June 2008 to combat soaring inflation. Rapid credit growth, higher public spending and surging food and energy prices pushed the inflation rate to the peak of more than 28% by August 2008, data from the International Monetary Fund (IMF) showed. 

The central bank lifted the refinancing rate to 15% again in October 2011 before gradually lowering the policy rate. By December 2018, the Vietnamese interest rate stood at 6.25%.

In 2019, the  SBV had only one rate cut, lowering the refinance rate to 6%. With benign inflation, SBV kept its refinance rate unchanged at 6% until the Covid-19 pandemic emerged. In 2020, the Vietnamese central bank had three rate cuts, lowering the refinancing rate to a record-low of 4%.

What’s driving the latest Vietnam interest rate rise?

In the latest Vietnam economic news, the country’s central bank made its first interest rate hike in two years. SBV lifted the refinancing interest rate by 100bp to 5% while the discount rate was increased to 3.5%, the central bank announced on 26 September.

What were the factors driving the central bank’s decision? Let’s investigate the key factors that were likely to shape the policy. 

Rising inflationary pressure

Although inflation rate had averaged at 2.58% in the first eight months of 2022, well below the 4% target, SBV expressed concerns about persistently high inflation abroad and the second round of rising inflationary pressure at home.


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The country’s Consumer Price Index (CPI) continued to ease in August, falling to 2.89% from the 3.37% June peak. The statistics office said the fall in petrol prices compensated for the increase in prices of consumer goods and services, and education tuition. DBS economist Chua Han Teng wrote in a note on 23 September: 

“Further upside pressures would still be present due to ongoing domestic strength, even as the external demand landscape becomes more challenging. Policymakers would be keen to curb such upside pressures, especially to avoid high inflation seen in previous episodes.”

On 28 September, ANZ Research forecast the inflation rate in Vietnam to average at 3.4% in 2022. The firm said: 

“However, from Q4, there are risks that headline CPI inflation will remain elevated for a couple of quarters and will require further monetary policy response.”

In September, the Asian Development Bank (ADB) kept its Vietnam’s inflation rate forecast unchanged from April’s estimate at 3.8% for 2022 and 4% for 2023. 


Weakening dong

Teng suggested the main driver of the central bank’s policy rate hike may be weakness in the Vietnamese dong against the USD, although the currency has outperformed its Southeast Asian peers, noting:

“In our view, the policy rate hike trigger was likely the Vietnamese dong’s weakness vs the US dollar, coupled with expectations of further USD upside pressures following the upward shift in the Fed’s expected terminal interest rate. The VND’s depreciation to an all-time low does not provide comfort to policymakers in a rising inflation environment.”

In a meeting on 26 September, the Prime Minister asked the SBV to “regulate with different monetary tools, such as the exchange rate, interest rate, credit limit, and the 2-percent interest rate subsidy program,” Vietnamnet reported. 

The USD/VND, the exchange rate for US dollar to Vietnamese dong, rose 0.13% on 28 September to an all-time high of VND 23,760, according to data from TradingEconomics. As of 28 September, the currency pair had gained 4.43% year-to-date (YTD). 

Compared to other Asian currencies, the dong has performed relatively well. For example, the Japanese yen has sharply depreciated, with USD/JPY gaining 29.23% YTD. The US dollar to the Philippine Peso (USD/PHP) has increased 15.87% YTD. And the USD/IDR (US dollar to Indonesian rupiah) has risen 6.79% YTD, according to Trading Economics, as of 28 September. 

ANZ Research forecast USD/VND to average VND 23,800 in 2022, dropping to VND 23,500 in 2023 and VND 23,250 in 2024. The firm said in a note:

“Although the recent hike in domestic policy rates will help, the US Fed’s rate hikes are expected to far outstrip the SBV’s hikes by the end of their respective hiking cycles. Furthermore, the ability of the SBV to defend the currency has diminished due to a rapid drawdown in its FX reserves in recent weeks, depleting Vietnam’s reserve adequacy metrics markedly.” 

Vietnam interest rate outlook for 2022 and beyond

The dong is facing increasing downward pressure from the Fed’s policy tightening, and the inflation rate is expected to accelerate. So, what’s the outlook for another Vietnam interest rate rise?

DBS’s Vietnam interest rate forecast expected the SBV to normalise the refinancing rate to the pre-pandemic level of 6% by the fourth quarter of 2022 and to potentially reach 6.5% by the first quarter of 2023. Teng wrote:

“Key factors that will drive additional policy rate increases include curbing downside currency pressures in the context of rising inflation, and less need for a very aggressive and loose monetary policy stance given the robust post-pandemic recovery.”

He stressed that the low interest rate policy, which worked for extraordinary conditions during the pandemic, was no longer justified, particularly with the risk of recession in the US, Vietnam’s largest export destination. The economist added:

“A careful monetary policy normalisation to rebuild some buffers would instead place Vietnam in a better position to deal with an increasingly difficult global external environment.”

TradingEconomics forecast Vietnam’s policy rate to reach 5% by the end of this quarter, rising to 6.5% in 2023 and dropping to 5.75% in 2024. ANZ Research predicted SBV would have another 50bp hike in the fourth quarter and two smaller hikes of 25bp each in the first and second quarter of 2023. 

Keep in mind that analysts' projections about Vietnam interest rate rise can be wrong. Forecasts should not be used in place of your own research. Always conduct your own due diligence before trading. And never trade money that you cannot afford to lose.


What is the current interest rate in Vietnam?

As of 28 September, Vietnam’s refinance rate stood at 5%, while the discount rate was 3.5%, according to the State Bank of Vietnam (SBV).

What factors affect interest rates in Vietnam?

There are several factors that affect interest rates in Vietnam, including inflation rate, gross domestic product (GDP) and the strength of the Vietnamese currency.

What is the Vietnam refinance rate?

According to SBV’s Banking Strategy Institute, the refinance rate is the interest rate of the central bank’s last lending resource for the market. It tends to be lower than the interest rates on the interbank market.

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