Further monetary tightening tipped to cure macro pains

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HSBC’s ASEAN economist Sherman Chan said the recent energy price hikes may push inflation higher in coming months

“But, continued monetary tightening should help to bring the readings back to single-digit territory towards the year’s end,” said Chan.

Headline inflation in Vietnam accelerated to 12.3 per cent year-on-year in February, drifting further away from the government’s ambitious target of 7 per cent. However, consumer price index (CPI) growth slowed for the third straight month in February, coming in at 1.1 per cent month-on-month compared with 1.6 per cent in January.

Banking Strategy Institute head Nguyen Thi Kim Thanh said that in this scenario, hiking the reserve requirement for Vietnam dong deposits could be the way to go.

At the moment, the reserve requirement for Vietnam dong deposits with terms less than 12 months is set at 3 per cent and for deposits of over 12 month terms, at 1 per cent.

“Fuel and electricity price hikes will add substantial inflationary pressures to the economy,” said Thanh.

Last week, the Ministry of Finance announced retail fuel prices would increase between 17 and 24 per cent as political unrest in North Africa and the Middle East continues. Meanwhile, from March 1, 2011, electricity prices would rise by 15 per cent.

Chan said that Vietnam’s inflation battle was far from over, with the figure sitting firmly in double-digit territory.

“Many fear the 9 per cent currency devaluation in February could result in strong import-led inflation,” he said.

“But we don’t expect much immediate impact, as retail products have likely been priced using black-market rates already. Instead, we are more concerned about the electricity price hike. Not only will it have a direct impact on the CPI, the move seems to also have ramifications,” added Chan.

In response in recent weeks, the government has been actively tightening its monetary policy to control inflation.

“Our forecast of inflation returning to single digits later in the year still holds,” Chan said.

The government agreed to restrain lending growth to below 20 per cent from 23 per cent, to cut the budget deficit to 5 per cent of gross domestic product.

Chan said that the government was moving in the right direction, with its policy focus recently shifted from boosting growth to improving economic stability.

“Inflationary pressures coming from excess demand should subsequently ease, but food price inflation which is more of a regional or even global issue is unlikely to subside remarkably. Therefore, meeting the government’s 7 per cent inflation target still appears to be a major challenge,” added Chan.

 “But we don’t expect much immediate impact, as retail products have likely been priced using black-market rates already. Instead, we are more concerned about the electricity price hike. Not only will it have a direct impact on the CPI, the move seems to also have ramifications,” added Chan.

In response in recent weeks, the government has been actively tightening its monetary policy.

“Our inflation forecast returning to single digits later in the year still holds,” Chan said.

The government agreed to restrain lending growth to below 20 per cent from 23 per cent, to cut the budget deficit to 5 per cent of gross domestic product.

Chan said the government was moving in the right direction, with its policy focus recently shifted from boosting growth to improving economic stability.

“Inflationary pressures coming from excess demand should subsequently ease, but food price inflation which is more of a regional or even global issue is unlikely to subside remarkably. Therefore, meeting the government’s 7 per cent inflation target still appears to be a major challenge,” added Chan.