Stock market set to benefit from SBV's monetary policies

Stock market set to benefit from SBV's monetary policies

Historical trends have frequently shown that lower interest rates stimulate retail investors into transfering some of their savings from bank deposits to equity markets, driven by the expectation for higher returns as stock markets gain momentum.

Outside the headquarters of the SBV in Lý Thái Tổ Street, Hoàn Kiếm District. — Photo courtesy of the SBV

Given the expansionary monetary policy being implemented by the State Bank of Vietnam (SBV), the Vietnamese stock market is expected to rally in the near future, said an insider.  

Starting February, the SBV has initiated several measures aimed at reducing both deposit and lending rates, thereby facilitating easier access to capital for businesses. 

As part of this monetary easing strategy, the SBV has responded to tightening liquidity by instructing commercial banks to lower interest rates, beginning with a directive issued on February 25. 

After the Tết holidays, some commercial banks were raising deposit rates to attract funds due to liquidity pressures. As a result, borrowers faced the potential for increased financing costs. 

The SBV mandated a reduction of interest rates by approximately 0.5 - 0.7 per cent across various tenures to alleviate this situation.

Additionally, the central bank emphasised the importance of maintaining a stable deposit interest rate environment while lowering lending rates. 

The banks were encouraged to cut costs and adopt technology to enable them to share a portion of their profits to lower lending rates. 

The SBV's strategy also focuses on directing credit toward priority sectors that foster growth, such as consumption, investment, export and digital transformation. Rigorous monitoring is being implemented to curb credit flow into high-risk areas to ensure systemic stability.

KIS Vietnam has noted that the central bank is keen on allowing enterprises to secure financing at reasonable interest rates, aligning with a targeted GDP growth rate of approximately 8 per cent for 2025, set by the Government.

These measures illustrate SBV's commitment to reducing interest rates, and while there may be limitations to their effectiveness, early indications suggest that actual lending rates are beginning to decline at numerous commercial banks. 

The SBV is also using open market operations (OMO) to manage short-term liquidity effectively, aiming to inject additional funds into the banking system. 

The goal of increasing liquidity is to prevent banks from competing for deposits by raising interest rates, which would consequently help lower both deposit and lending rates.

The Government has further instructed the SBV to relax monetary policy guidelines to stimulate growth. 

On March 5, the Prime Minister urged a review of operational interest rates, including reducing refinancing rates, OMO rates and overnight lending rates, to further lower borrowing costs throughout the economy. 

In response to this directive, the SBV has actively initiated several monetary policy measures since early March.

In the first week of March, the SBV ceased issuing treasury bills—short-term securities used to absorb excess liquidity and reduced the interest rate on these bills from 4 per cent to approximately 3.2 per cent. 

The decline in treasury bill rates has bolstered liquidity within the banking system, creating ample room for further rate reductions.

Moreover, the SBV has increased the volume of cash injections through OMO, extending loan maturities longer than before. 

Previously, OMO loans typically had a maturity of just seven days. However, at the beginning of March, the SBV started offering OMO loans with terms of up to 28 days, with some auctions extending as far as 35 to 91 days. 

This significant shift indicates the SBV's intention to support longer-term liquidity conditions within the banking sector, thereby providing a stable source of funding for broader economic lending.

The results of these liquidity-enhancing measures have begun to materialise. Interest rates within the interbank market, where banks lend to each other, have dropped noticeably. 

At the end of February, overnight interbank rates were hovering around 4.5 - 5 per cent per annum, but by mid-March, those rates had declined to below 4 per cent per annum.

The anticipated reduction in interest rates not only has direct implications for borrowing costs but is also poised to generate positive signals for the Vietnamese stock market. 

Typically, when deposit interest rates decline, traditional savings accounts become less appealing, prompting investors to seek alternative investment avenues with greater profit potential, such as the stock market or real estate.

Historical trends have frequently shown that lower interest rates stimulate retail investors to transfer some of their savings from bank deposits to equity markets, driven by the expectation for higher returns as stock markets gain momentum. 

In addition, falling borrowing costs can aid companies in reducing their financial burdens, which enhances profitability and contributes positively to overall corporate valuations. 

Bizhub