The prospect of the Fed keeping rates higher for longer is increasing pressure on the
exchange rate and narrowing the room for rate cuts in Vietnam. In the context where NHNN prioritizes exchange-rate stability and the banking system still faces funding mobilization pressures, the domestic rate level is likely to remain elevated in the near term before cooling gradually toward year-end.
Fed hawkish stance, FX pressure narrows room for rate cuts. The market’s strong reaction to new signals from the Fed has a basis, as the US inflation outlook has shifted significantly. Forecasts for year-end PCE inflation have been revised from 2.7% to 3.6%, while core PCE rose from 2.7% to 3.3% due to higher energy prices stemming from the Iran conflict and demand from the AI investment wave. Meanwhile, the US labor market remains robust with unemployment at 4.3%, weakening the case for rate cuts.
Notably, the composition of the Fed’s rate projections has shifted. Currently 9 of 19 members see the need to raise rates before the end of 2026, whereas in March none did. Conversely, only one member now foresees a rate cut, down from 12 in the previous projection. Moreover, six of the nine members supporting hikes argue for more than one increase, each by 25 basis points.
This suggests inflation has begun to embed into market expectations and the hawkish Fed scenario is well grounded. Although Fed Chair Warsh emphasizes that if the Fed maintains confidence in controlling inflation, price shocks such as those linked to Iran may be temporary and not necessarily require a strong reaction, the market interprets it as inflation potentially lasting longer than expected and the probability of cuts this year having diminished.
Domestically, NHNN’s maintenance of a relatively high USD/VND swap spread is viewed as a signal that FX stability remains the top priority amid a stronger dollar, prolonged Middle East tensions, and ongoing domestic credit demand. Vietnam’s 15% credit-growth target for the year also reflects this stance.
To bring real rates down meaningfully, conditions must align externally (easing Middle East tensions and no Fed hikes) and internally (stronger policy support and improved funding flows back to banks).
Looking to the second half of 2026, the key variable remains NHNN’s policy trajectory. Liquidity-support measures, including adjustments to capital-safety and liquidity ratios, will play a decisive role in the evolution of rates. Assuming the USD/VND swap remains high and Iran tensions ease, the FX environment could stay stable, but funding conditions imply domestic rates will stay elevated unless further policy measures or clearer macro improvements emerge. The market’s base case is that rates have perhaps peaked and will ease gradually toward year-end.
Two major risks could alter this scenario: a renewed escalation in Iran-related developments or hotter-than-expected US inflation prompting further Fed tightening; or domestic factors, namely slower-than-expected return of deposit funding to banks.
