This is the Federal Reserve's first interest rate cut since March 2020. In a statement following last week’s policy meeting, Fed policymakers expressed increased confidence that inflation is on track to stabilise towards the 2 per cent target and indicated readiness to adjust monetary policy if risks emerge that could hinder the achievement of their inflation and employment objectives.

Moreover, Fed policymakers signalled the possibility of a further 0.5 percentage point rate cut by the end of this year. Subsequently, the Fed plans to reduce rates four times in 2025 and cut rates an additional two times in 2026.

“The Fed’s interest rate cut will relieve pressure on monetary policy in various countries, especially developing ones, including Vietnam. The State Bank of Vietnam will have more room for flexible policy management to support economic recovery and stimulate growth, particularly by alleviating the pressure of rising interest rates experienced recently,” said Dr. Vo Tri Thanh, a member of the National Advisory Council for Monetary Policies.

Suan Teck Kin, executive director of Global Economics and Market Research at UOB

In an interview with VIR, Suan Teck Kin, executive director of Global Economics and Market Research at UOB, expressed optimism that this was a good starting point for policymakers to assess current developments.

“Despite the impact from Typhoon Yagi and a notable rebound in the exchange rate since July, we continue to expect the SBV to maintain its key policy rates for the rest of 2024, as the central bank monitors upside risks regarding price pressures. Overall, the CPI rose by 4 per cent on-year in August, slightly below the 4.5 per cent target. Upward pressures on prices may intensify following disruptions to agricultural output, given that food accounts for 34 per cent of the CPI weight,” Kin said. “The SBV is likely to adopt a more targeted approach to support affected individuals and businesses in their regions, rather than implementing a broad, nationwide tool such as interest rate cuts. Consequently, we anticipate the SBV will maintain its refinancing rate at the current 4.5 per cent while focusing on facilitating loan growth and other support measures.”

UOB also provided a forecast regarding the Fed's potential for further interest rate cuts before the year ends, stating, “Post-September FOMC, we expect the Fed to continue the rate cut cycle in the remaining meetings of the year, where we forecast 50 basis points cuts for the rest of 2024, with each 25 basis points cut in the November and December 2024 FOMC meetings."

"Where we differ from the Fed is that our terminal rate is projected at 3.25 per cent, expected to be reached by early 2026, compared to the Fed’s longer-run view of 2.9 per cent. However, as UOB has previously pointed out, the Fed has nudged up the longer-run median view of the Federal Funds Target Rate in the last two Dot Plots, so we would not be surprised if it is lifted further towards the 3 per cent handle in subsequent reports, thus likely converging toward our terminal rate projection,” he said.