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Too early to think of slashing interest rates: Standard Chartered
Standard Chartered has released a report which says that the petrol price increase will lead to continued high inflation, and forecast that the State Bank of Vietnam will not cut the basic interest rate in the near future.
The recent decision to raise the petrol price will surely spur inflation in the coming months. Bringing the domestic petrol price closer to the world’s price proves to be a correct move, and it also means that the State Bank of Vietnam may strengthen the tightening of monetary policies.
Believing that the fight to restrain the hot development of the national economy will continue, Standard Chartered said that it is now too early to think about cutting the basic interest rate.
The petrol price hike, according to Standard Chartered, will help ease the burden from petrol price subsidisation. The state spent VND14.5tril in the first half of the year to compensate importers for losses, and the figure might have reached VND70tril in 2008, if the oil price remained at $130-150/barrel. The petrol price hike will help reduce smuggling and the trade deficit.
However, it is clear that the petrol price hike will have bad impacts on inflation in Vietnam. It is expected that the inflation rate in August will increase by 0.7-1% over July.
In its May report released May 28, Standard Chartered predicted that Vietnam’s inflation rate may reach 30% in Q3 compared to the same period of last year.
In the latest report, Standard Chartered said that the rate will remain steady in Q4 and may stay at 20% in Q1 of 2009 before declining. It said the inflation rate will be 25% in 2008 and 15% in 2009.
Loosening the monetary policies before the State Bank can control the situation may lead to the risk of investors losing confidence, especially as the inflation rate is expected to remain at over 20% for 6-9 months.
Though the government subsidises petrol, Vietnam’s petrol price is still higher than in some regional countries. A92 petrol, for example, is now priced at VND19,000/litre ($1.15), VND7,800/litre lower than Singapore, but VND8,500/litre more than Indonesia, VND6,800/litre more than China, and VND5,500/litre more than Malaysia.
Standard Chartered experts believes that it is now not the right time to think of cutting basic interest rates as the interest rate cuts will put harder pressure on the market, as foreign investors expect the State Bank to maintain the tightened monetary policies to restrain inflation.
VNN
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