Dec 4, 2012

Vietnam - Interest Rates Set To Be Fired Up

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The government is hinting that it would try to lower lending interest rates to boost economic growth.

This comes as the consumer price index stabilises to single digits, but officials still stress that  inflation control is the top priority next year.

The General Statistics Office reported consumer price index (CPI) in November accelerated at only 0.47 per cent against October, or 6.52 per cent against December 2011. The index in November is much lower than it was in 2010 and 2011 when CPI respectively reached 11.09 per cent and 19.83 per cent.

“Given economic laws, lending interest rates decline when inflation rate declines,” Minister Vu Duc Dam, chairman of the Government Office told a governmental press meeting last week.

High lending interest rates pose big challenges for private enterprises hoping to expand businesses in Vietnam during the past two years, as the government has implemented tightened monetary and fiscal policies to rein in inflation which peaked at 18.13 per cent in 2011.

In an announcement released last week, the government estimated that the inflation at the end of this year could be from 7 per cent to 8 per cent.

“This is a condition allowing us to lower lending interest rates. The government requested the State Bank to make a plan for lowering lending interest rates within this December,” said Dam.

At the meeting, Dam said the government would also consider applying a cap for lending interest rates, a measure aimed at assisting enterprises to approach capital at banks. Currently, the government is implementing a cap for mobilising interest rate at banks.

Dam added Vietnam’s economy was in transition progress, thus the government still had to apply administrative measures to manage interest rate movements. However, he noted that the government would ensure the administrative measures are not against the market laws.

Although the government hinted that it could ease the monetary policies, the top priority in upcoming months and even in 2013 remains inflation control.

“The government will keep inflation in 2013 lower than this year, while trying to boost economic growth higher. These targets are not changed till now,” Dam said.

“The State Bank may cut rates by 100bps in the fourth quarter [2012] or early 2013. However, we expect inflation to briefly reach double digits in the second half of 2013 due to healthcare prices and base effects, which may shift the State Bank’s bias towards tightening after mid-year,” Vincent Conti, economist of Asia Economics at ANZ Banking Group, wrote in a note recently.

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