Vietnam eyes more rate hikes as IMF urges tougher inflation stance

Vietnam must raise interest rates further if high inflation persists, a central bank official said on Thursday, as the International Monetary Fund urged Hanoi to take a tougher stance against soaring prices.

* More policy rate hikes needed in face of inlation -IMF

* Confidence in govt policies “fragile” -IMF

* C.bank “must” raise rates if very high inflation persists -deputy gov (Recasts)

By John Ruwitch and Tran Le Thuy

Vietnam must raise interest rates further if high inflation persists, a central bank official said on Thursday, as the International Monetary Fund urged Hanoi to take a tougher stance against soaring prices.

Confidence in the government’s policies was “fragile”, the IMF said, and it was essential that the government send “a strong signal” that it will remain committed to macro-economy stabilising measures beyond 2011.

“The immediate challenge will be to respond to the upward trend in inflation, and prevent it from feeding into higher inflation expectations and putting pressure on the dong. This requires further increases in policy rates,” the Fund said in a report prepared for a semi-annual meeting of international donors and government officials.

Vietnam’s inflation rate is among the highest in the world. Inflation quickened to 19.8 percent in May over the same month last year and is still accelerating as a monetary overhang, hikes in state-mandated power and petrol prices and higher food prices work their way through the economy.

Economists and investors worry that policymakers in Hanoi will ease up on their inflation battle once price pressures begin to abate and turn their focus back to ramping up economic growth, potentially laying the foundation for another bout of overheating.

Responding to the IMF’s comments, deputy central bank governor Nguyen Van Binh told Reuters: “I think if inflation is still very high in the forthcoming period of time (then) of course in order to contain inflation I think we must raise policy rates of the State Bank.”

He said the policy rate “may be a little bit higher” than the government’s new inflation target of 15 percent.

“If the situation is cooling a little bit I think it’s a chance for us to keep policy rates the same,” Binh added.

Vietnam is committed to following policies to stabilise the economy into next year and even 2013, Deputy Prime Minister Nguyen Sinh Hung said on Thursday, adding that the result may be economic growth below 7 percent until 2014.

He said he expected gross domestic product growth in 2012 and 2013 to be 6-7 percent, which was below the target for the coming five years set at a Communist Party congress in January of 7-8 percent. If the economy can attain stability, then GDP growth could rise above 7 percent again in 2014, he said.

Johanna Dee Chua, head of Asia Economics and Market Analysis for Citigroup Global Markets Asia, said Hung’s comments were like “music to my ears”.

“A strong signal is good because it anchors expectations,” she said. “It’s also good for the stability of the dong.”

The government has raised interest rates several times since late last year, lowered credit growth and money supply targets and made commitments to cut spending and boost state revenues. It also has trimmed its GDP growth targets twice and raised its inflation expectations for this year.

The Vietnamese economy grew 5.3 percent in 2009 and 6.8 percent last year.

SIGNIFICANT CHALLENGES

But the IMF said the economy still faced “significant challenges”.

ANZ said in a report on Wednesday it expected policy rates to be raised by another 100 basis points. HSBC said in a report on Tuesday more rate hikes were in the pipeline, including a 300 basis point rise in the refinance rate to 17 percent this year.

The reverse repo rate for open market operations currently stands at 15 percent, the refinance rate is at 14 percent and the discount rate is 13 percent.

The World Bank echoed the IMF’s concerns in a report on Thursday, saying efforts to stabilise the economy were only half done.

“The authorities need to remain vigilant against premature withdrawal of stabilisation measures,” it said.

After a cabinet meeting last week the government said it expects GDP growth in 2011 of 6 percent and inflation of 15 percent.

The IMF noted that the Vietnamese currency has been trading within its band, and said foreign exchange reserves had started to rise, and were $13.5 billion in May, up $0.9 billion.

The Asian Development Bank reported in April that Vietnam’s foreign exchange reserves last year dropped 12 percent from 2009 to $12.4 billion and were enough to cover just 1.9 months of imports at the end of 2010.

Hung said the currency would remain stable through the rest of the year and the government might be able to rebuild forex reserves to a targeted 16 months of imports next year. It had added about $2 billion in recent months, he said.

But the IMF cautioned that expectations that the dong will again come under pressure remained “entrenched”.

On Feb. 11 the State Bank of Vietnam devalued the dong by 8.5 percent, narrowed its trading band against the dollar. It was the third devaluation in a year.

The beleaguered currency, which had shed more than 20 percent of its value in the three years leading up to the latest devaluation, has been largely stable recently. – Reuters