Sharp action to carve out inflation response

Inflation has become the elephant in the room that needs to be talked about

Policymakers on November 5, decided to stop asking commercial banks to lower interest rates and the central bank even hiked the benchmark rate, resuming the monetary tightening cycle.

Accordingly, the State Bank raised the base rate from 8 to 9 per cent, marking the first hike since December, 2009. The discount and refinance rates were also hiked by 1 per cent to 7 and 9 per cent, respectively.

HSBC’s economist for ASEAN Sherman Chan said Vietnam’s government seemed committed to tackle the current economic challenges, but the battle would not be over in a short period of time. “More policy actions are expected in coming months to tame inflationary pressures and downward pressures on the Vietnamese dong,” she said.

The consumer price index (CPI) in October rose 1.05 per cent  against September, or 7.58 per cent compared with December 2009. It is the second straight month the CPI increased above 1 per cent month-on-month. In September, CPI rose 1.31 per cent against August, the highest increase since February.

Pham Do Chi, an independent economist, said the tightening monetary policy was the most basic measure to control inflation at this point.

On November 4, the government also vowed not to implement another round of currency devaluations before Tet, the Lunar New Year national holiday in February, 2011.

“The Vietnamese economy is facing multiple challenges and the government appears keen on arresting any deterioration in economic conditions. Meanwhile, the five-yearly national congress to be held in January, during which the leadership could be reshuffled, may have also motivated incumbent policymakers to promptly address economic concerns,” said Chan.

Up until last week, Vietnam still appeared to be the only emerging Asian economy to have a loosened monetary policy and its currency may also be the only one facing depreciation pressures.

Chan said devaluation expectations might have contributed to strong dong downward pressures in recent weeks and weak capital inflows into Vietnam.

Growth had appeared to be the only policy goal thus far in the year, but actions taken by the government last  week suggested that a more balanced approach would be adopted, with curbing depreciation pressures and inflation also taking priority, she said.

The latest rate hike is unlikely to have any large immediate impact on market rates or the currency, since market rates have been above the policy rates.