Bloomberg News

IMF Says Vietnam Should Focus on Inflation Over Rate Reductions

June 04, 2012

Vietnam’s central bank should prioritize containing inflation and be cautious about lowering interest rates further after reductions in the past three months, the International Monetary Fund said.

The government should focus on economic stability even if it means accepting “somewhat slower growth,” Sanjay Kalra, the IMF’s resident representative for the country, said in a statement today. Vietnam has a history of loosening monetary policy prematurely, and the rate cuts may cause price pressures to re-emerge in as little as three months, the World Bank said separately today.

Vietnam cut interest rates last week for the third straight month as policy makers stepped up efforts to bolster a struggling economy after inflation eased to the lowest since 2010. The economy expanded 4 percent in the first quarter, the slowest since 2009, and growth in the current three-month period may be as low as 4.4 percent, Deputy Minister of Planning & Investment Cao Viet Sinh said today.

“Risks to the outlook for 2012 include a loss of market confidence in the government’s policy orientation,” Kalra said at a conference in the central Vietnamese town of Dong Ha. “Government policies need to credibly prioritize stability.”

The central bank cut its refinancing rate to 12 percent from 15 percent between March and May and reduced its repurchase rate to 11 percent from 14 percent over the same period. Inflation slowed to 8.34 percent in May after reaching 23 percent last year, the fastest in Asia.

Inflation may ease to as low as 5 percent next quarter and range between 6 percent and 8 percent by the end of the year, according to a JPMorgan Chase & Co. report today. The central bank’s policy rates may be cut by as much as 300 basis points by the end of the third quarter, JPMorgan economists estimate.

While the three rate cuts came “earlier than expected for most market participants,” inflation has also slowed more rapidly than had been anticipated, the IMF said.

The State Bank of Vietnam will “steer interest rates on a declining path,” and may eliminate a rate cap on dong deposits, central bank Deputy Governor Le Minh Hung said in a statement distributed at the conference today. Inflation is “expected to be under control,” he said.

--Jason Folkmanis and Nguyen Dieu Tu Uyen in Dong Ha, Vietnam. Editors: Shamim Adam, Rina Chandran

To contact Bloomberg News staff for this story: Jason Folkmanis in Dong Ha, Vietnam at folkmanis@bloomberg.net; Nguyen Dieu Tu Uyen in Dong Ha, Vietnam at uyen1@bloomberg.net

To contact the editor responsible for this story: Stephanie Phang at sphang@bloomberg.net


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