Dissemination workshop of Policy Opinion I/2023

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Policy Opinion 1

Although the economy is recovering from the pandemic, downside risks have increased due to a variety of uncertainties, including the ongoing war in Ukraine and other geopolitical tensions, inflation, markedly tightening global financial conditions and China's slowing economy. The possibility of a considerable slowdown in growth for the US economy in 2022 is due to a decline in consumer and business confidence amid softening demand under the impact of high inflation and other tight financial conditions. The impact of the Ukraine crisis and inflation, particularly in the price of energy imports continue to have a significant negative impact on the economies of the Euro area. China's economic recession was more severe than expected due to the negative effects of the spread of the Covid-19 strain and the persistence of restrictions, as well as the escalating real estate market crisis, weakened domestic consumption and global demand. Through imports, China's decline might spill over into other major economies and the outlook for the global economy in 2023. In the context of the world economy facing significant hurdles because of inflation, with gloomy forecasts for global growth in 2023, a number of major central banks are expected to keep raising interest rates to restrain price increases despite recession warnings. To control inflation, a number of central banks, primarily the US Federal Reserve (Fed) and the European Central Bank (ECB), will dramatically increase interest rates. This will create a wave of divestment from emerging economies.

In order to proactively respond to inflation risks Vietnam has recently implemented policy changes that are considered to be highly flexible and appropriate for the current scenario, in which interest rates are still the primary tool to control inflation. The increase of the operational interest rate helps stabilize the exchange rate, lessens the pressure on the State Bank to intervene in the foreign exchange market, and prevents excessive reduction in foreign exchange reserves. However, rising interest rates will also affect production costs, making the profit margins of enterprises in general narrow in the near future. With the financial support from KAS Vietnam, the Vietnam Institute of Economic and Policy Research carries out a comprehensive report to assess “Impact of high interest rates on macro-economic stability and growth recovery in 2023”.

The report focuses on the following aspects:

- Reviewing the global financial market and the growth of the world economy in 2022

- Discussing competitive pressures of interest rates on Vietnam's economic growth in 2023

- Provide policy recommendations for macroeconomic stabilization, post-pandemic economic recovery, and response to the risk of a global recession.