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High inflation may force Vietnam to tighten policy

Vietnam, hit by inflation of more than 17 percent in April, needs to find ways to tighten monetary policy further without causing a spike in interest rates that chokes business, economists said yesterday.

They said authorities are likely to raise key rates and dong reserve requirements, but said steps need to factor in what the banking system can cope with, as the interbank market has largely frozen up except for overnight loans, whose rates have soared to 19-20 percent.

Vietnam, which last year pushed for strong growth, now is battling some of the highest inflation in Asia. In February, the government devalued the dong 8.5 percent and it has taken other steps, but so far inflation rates have continued to rise.

For April, the consumer price index rose 3.32 percent from March, the highest since May 2008, the General Statistics Office said on Sunday. The annual inflation in April – 17.51 percent – was the highest for the past 27 months, it said.

The April annual inflation exceeded all expectations and it suggests that inflation this year will likely breach 20 percent year-on-year before gradually slowing, JP Morgan Chase Bank said in a report.

“We now forecast inflation to peak around 22 percent year-on-year in August and to average around 18 percent in 2011,” it said.

To try to battle inflation, the government has raised key rates, cut credit and money supply growth targets and slashed public investment.

The higher than expected inflation for April was on account of the recent increase in power, fuel and coal prices as well as the effect of February’s devaluation, said Deepak Mishra, lead economist for the World Bank in Vietnam.

He said authorities will have to continue to adhere to the credit and liquidity targets it announced in late February and “revisit the policy rates in light of the higher-than-expected inflation rate.”

Though recent anecdotal evidence suggests that access to credit has tightened and is now more expensive, the impact of recent measures on inflation will not become clear until later this year, the Australia and New Zealand Banking Group said in a report.

“We continue to expect the State Bank of Vietnam to hike its repo and refinancing rates by another 100 basis points in the second quarter,” the report said.

The repo, or reverse repurchase rate, was raised by one percentage point, to 13 percent, on April 1. The rate, which bankers said the central bank now treats as a benchmark, was 7 percent in early November 2010.

Le Dang Doanh, a former government adviser, said the central bank has done much to curb inflation and it has few tools in hand, including raising dong reserve requirements.

From Reuters

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