Vietnam: Central Banks Should Raise Key Interest Rates by 100Bbps in July, ANZ Says

by RVMania Thu Jul 14, 2011 9:42 am

Vietnam: Central Banks Should Raise Key Interest Rates by 100Bbps in July, ANZ Says

Posted: July 13, 2011

VietFinanceNews.com – The central bank needs to raise its key interest rates by another 100bps this month to manage inflation expectations, said ANZ it its July report about emerging Asian eonomics.

Despite the continued moderation in growth of real activity, inflation pressures persist and warrant continued tightening of monetary and fiscal policies, it reasoned.

Notwithstanding a 30% drop against the US dollar since early 2008, Vietnam’s balance of payments position remains fragile. Moreover, CPI inflation continues to rise unabated—now 20.8% (y/y) compared with 8.7% a year earlier. While ANZ economists expect inflation to peak in Q3, it will remain in the uncomfortable double digits well into 2012.

ANZ also suggested the authorities in Vietnam to continue to slow domestic demand to tame inflation and restore its balance of payments position.

Economic growth has already slowed to 5.6% (y/y) in H1 2011 compared with a five year average of 6.4%. Key for the dong going forward is whether the authorities have tolerance for much more. For now, their bias remains for further gains in USDVND.

The government recently said that tight and cautious monetary policies will continue in 2012. It targets 2011 GDP growth at 6.0% and inflation at 15.0%.

In the forex market, ANZ said the dong is now expected to hold steady into year-end. Nevertheless, still significant pressures remain, suggesting another devaluation in Q1 2012.

However, they were positive that recent indicators out of Vietnam suggest that government measures to stabilize the foreign exchange market and restore confidence in the dong are having positive effects.

Since February’s devaluation, the SBV has raised official interest rates by a cumulative 500bps and has raised the reserve requirement ratio for USD deposits by 600bps. Caps on USD deposit interest rates were imposed in April, and then lowered in June (to 2.0% for retail investors and to 0.5% for institutions). Along with other administrative measures that clamped down on black market FX trading, these policies have eased onshore demand for USD.

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