Race to bring sky high inflation back to earth

The public is counting the cost of inflation as the cost of living spirals

On April 29, the monetary authority issued Decision No.929//QD-NHNN which raised both the refinancing and overnight lending rates by 1 per cent to 14 per cent

This is similar to the March 31 move when the  refinancing and overnight lending rates were increased by 1 per cent, on that occasion to 13 per cent.

The move comes nearly a month after an earlier hiking of the refinancing and discount rates to 12 per cent from 11 and 7 per cent respectively - aggressive moves  to improve macro-economic stability.

Nguyen Thi Kim Thanh, head of the Banking Strategy Institute, said the moves made at the end of almost every month were clear evidence of the government’s determination to rein in inflation.

“Stubborn inflation has tied the authority’s hands and tightening might be the best solution,” said Thanh.

Last week, Vietnam’s General Statistic Office released macroeconomic data showing the consumer price index (CPI) rose by 3.32 per cent month-on-month in April, driving year-on-year CPI to 17.5 per cent, the highest level since December, 2009.

The office explained that the Ministry of Industry and Trade’s decision to raise petrol prices by 10-15 per cent on March 30 was one of the major factors affecting the CPI increase.

The  decision  saw  A92 petrol prices surge by 10 per cent to VND21,300 per litre while diesel prices climbed 15.3 per cent to VND21,100 per litre.

According to calculations done by economic analysts at Viet Capital Securities, a 10-15 per cent increase in petrol could directly add 0.36 per cent to CPI, with most of that rise appearing in the April figure and the rest in May’s number.

“Considering prices at the pump were 10-15 per cent below imported gasoline prices and that the government had removed all duties on imported petrol, the state had little choice but to increase market prices. As it attempts to reduce its budget deficit, the government will avoid subsidising gasoline imports. Although this will enable the country to move closer towards market mechanisms in the long run, the short-term effect will obviously [be an] increase in domestic prices,” said analysts.

Duong Thu Huong, general secretary of the Vietnam Banking Association, said that the tightening of monetary policy was in line with inflationary movements.

“However, hiking the reserve requirement is not an appropriate at this point of time as it could seriously hurt the banking system’s liquidity,” said Huong.

By end of last week, dong liquidity remained low with the overnight lending rate via the interbank market fluctuating at a high 18-19 per cent, per year.