New US interest rate to exert pressure on Vietnam’s inflation goal

The U.S. Federal Reserve lifted interest rates for the third time this year by a quarter of a percentage point to a range of 2.00 percent to 2.25 percent on Wednesday, foreseeing another rate hike in December.

Economist Nguyen Tri Hieu said this increase will pressure the USD-VND exchange rate, as the dollar strengthens further over the dong.

Local banks will push their interest rates up to prevent their customers from exchanging local currency to the U.S. dollar, he said.

Imports will be priced higher in VND, pushing the consumer price index (CPI) higher, Hieu said.

“It is very likely that CPI will surpass the country’s goal of 4 percent for the year,” he added.

Echoing Hieu, HSBC country head of global markets Ngo Dang Khoa said that the U.S. interest rate moves will create challenges for Vietnam’s economy as the inflation rate is closely approaching the government’s limit.

The weakened VND can also lower capital flow from foreign investors as they might not be confident in making further investments, Khoa said.

It can also slow down the equitization (privatization) of state-owned enterprises as changes in the dong’s value will affect the stock market, he noted.

“For local businesses, higher interest rates will increase capital expenditures, which will have a direct impact on their profit.”

But Khoa said he believes there are also opportunities for Vietnam to increase exports to the U.S. as spending and demand for investment in the U.S. will rise with the new interest rate.

Between January and September this year, Vietnam’s GDP grew by 6.98, the highest nine-month growth rate in eight years. Inflation for this period was 3.57 percent, according to the General Statistics Office.