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Further fiscal & monetary tightening in coming months

Be prepared for more fiscal and monetary tightening in coming months, Sherman Chan – HSBC’s economist, ASEAN wrote in a report dated May 4.

The following is HSBC report dated May 4.

Vietnam hikes key interest rate by 100bp to 14%

Monetary tightening continues in Vietnam, with the central bank raising the OMO rate today. This marked the sixth round of rate hikes since February. As the long-standing economic challenges such as high inflation and a large trade deficit are yet to be brought under control, policymakers have been kept on guard. We expect further fiscal and monetary tightening in coming months, which should help to gradually arrest demand-driven inflationary pressures. That said, a meaningful slowdown in CPI growth is not expected until Q4.

Facts

The State Bank of Vietnam raised the open market operations (OMO) rate by 100bp to 14% today. This follows tightening actions on April 29, when the refinance and discount rates were hiked by 100bp to 14% and 13%, respectively. Today’s announcement represents the sixth round of rate hikes since February.

Implications

The Vietnamese authorities deserve our applause for facing up to tough economic issues. Today’s rate hike was just another step in the long battle against inflation. Although the policy stance has clearly shifted from boosting growth to improving economic stability since February, the data flow remains challenging. The April batch of economic indicators shows that inflation is still accelerating (in part attributed to the recent energy price hikes), while strong imports continue to keep the trade deficit uncomfortably large, and industrial production is yet to lose steam. More importantly, credit growth remains buoyant. Meanwhile, the still-subdued FDI numbers confirm the fact that investor confidence has yet to be fully restored

Vietnamese policymakers seem well aware of the current economic situation, this week disclosing revised expectations for growth and inflation for 2011. The government now expects GDP growth to come in at 6.5% (compared with the approved target of 7-7.5%), while the inflation target was raised to 11.75% (compared with the initial goal of 7%). Despite these revisions, Vietnamese policymakers should be applauded for being realistic. Given their recent reiteration that tackling inflation takes priority, we expect further tightening actions on both fiscal and monetary fronts until inflation shows a meaningful slowdown, which we expect will take place no earlier than Q4.

Bottom line: Another encouraging move by Vietnam’s central bank, as the attempt to improve economic stability has made little solid progress thus far. Be prepared for more fiscal and monetary tightening in coming months.

From HSBC

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