Big news: Central Bank lowers interest rates!

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So the big news today is that the Vietnamese central bank cut policy rates by a quarter of a point to 6.0%. This is the first cut since 2017. And back then it had been almost 2 years before that the rate had been cut (by 50bps). So this is a big deal. And it appears mainly driven by concerns over global economic conditions, not because of weakness in Vietnam’s economy. So what happened and why:

PERCENTAGE CHANGE IN CONSUMER PRICES IN ASEAN. SOURCE; WORLD BANK

PERCENTAGE CHANGE IN CONSUMER PRICES IN ASEAN. SOURCE; WORLD BANK

  • The stock markets rose. Ha Noi (HNX30) is up 1.2%, while HCMC’s market (VNINDEX) rose a similar 1.14%. Stocks love lower rates, especially if the move isn’t especially a signal of recession (and even if it is).

  • When rates fall, stock prices rise for a few reasons. Companies benefit a bit from lower interest payments, although it’s fairly marginal. Also, bonds will look less attractive than stocks on a relative basis (the return is less). Plus, the present value of future cash flows is a bit higher (it is discounted at a lower rate, which is positive for present value).

  • The reason the central bank could do this is because inflation really is not a concern. Not in Vietnam, not in ASEAN (see chart to right), and not globally (CPI rose just +1.7% yoy in the US). Consumer prices rose 3.5% in 2018. This year doesn’t seem to be a concern - the forecast is below 3%.

  • This is another example of a central bank focusing more on global trends than on local ones. We talked this in the context of the Fed yesterday, but it turns out that it’s true for every central bank.

  • This might make it a bit harder to maintain the exchange rate, although there didn’t seem to be much stress on the currency market today. Why? Well, you might see investors less interested in buying Vietnamese bonds. If they aren’t buying bonds, then they aren’t buying the currency, and the currency might fall. But the VND isn’t floating, so that’s not happening.

  • This leads me back to my perennial concern: debt not denominated in VND is dangerous and doesn’t allow as much leeway with local interest rates. But no one is going to listen to me. Probably for good reason.

Congrats to all the people that made money on this surprise announcement!