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Vietnam signals rate cuts as Asia’s fastest inflation eases
Vietnam signaled that it may cut policy interest rates to “more suitable” levels after the first quarter and weaken the dong this year as Asia’s fastest inflation eases.
“The central bank will adjust policy rates to more suitable levels, aiming to help ease the average level of market interest rates,” central bank Governor Nguyen Van Binh said at a press conference Wednesday.
Vietnam faces a trade deficit, risks in the banking sector and slowing economic growth as the global recovery falters. While Indonesia and Thailand have cut borrowing costs in recent weeks to shield expansion, the World Bank and International Monetary Fund said last month Vietnam may undermine progress toward economic stability if it loosens monetary policy too soon.
“Based on recent policy statements they’ve made and the fact that inflation is slowing and growth is weakening, and given the pressures they’re under, I would be 99 percent sure that he meant that the next adjustment in rates would be down,” Gareth Leather, a London-based economist at Capital Economics, said after Binh’s comments.
Vietnam needs to show credibility by sustaining stabilization efforts, Victoria Kwakwa, the World Bank’s country director in the nation, said yesterday in an interview in Hanoi.
“They have the opportunity to show that they are breaking with the past,” she said. “Vietnam is now about sticking with macro-stability when it is needed and not just throwing it to the wind when we have pulled back from the edge of the cliff.”
Weakening currency
Consumer-price growth in 2012 may be less than 12 percent at worst and 8.5 percent to 9 percent in a “good” scenario, Binh said at an economic conference yesterday in the capital, compared with 18.13 percent in December.
Vietnam’s dong weakened 7.4 percent against the dollar last year, including a devaluation of about 7 percent in February. The currency climbed 0.1 percent to 21,013 per dollar yesterday. The VN Index of stocks closed up 0.8 percent.
“We believe that 2012 will be a hard year, a challenging year for Vietnam’s economy,” Binh said. “Slowing inflation is a prerequisite for interest rates to drop, but it doesn’t always happen like that.”
Purchases of dollars and gold by Vietnamese seeking stores of value have put pressure on the dong. Binh said the currency will gradually depreciate 2 percent to 3 percent this year.
The nation will also focus in the first quarter on easing bank liquidity challenges, including through restructuring five to eight lenders, Binh said.
Asset quality
The banking sector is showing signs of stress and asset quality remains a “concern” given “unusually high” credit growth in recent years, the World Bank said last month.
Last year, the State Bank of Vietnam unveiled plans to create a three-tiered financial industry dominated by 15 lenders as part of efforts to allay concerns over the banking system.
Credit in Vietnam expanded 13 percent in 2011, Binh said. The nation targets a balance of payments surplus of $3 billion in 2012 and enough foreign-exchange reserves to cover 12-15 weeks of imports by 2015, he also said.
Vietnam’s inflation rate in December moderated from 19.83 percent in November. It remains the fastest in a basket of 17 Asia-Pacific economies tracked by Bloomberg.
If inflation eases to 9 percent, deposit rates will fall to 10 percent to 11 percent, Binh said. Interest rates will be stable in the three months through March, he said.
The State Bank of Vietnam cut its repurchase rate to 14 percent from 15 percent in July last year. The refinancing rate is 15 percent and the discount rate is 13 percent.
The economy, a production hub for companies such as Intel Corp., grew 5.89 percent in 2011, down from 6.78 percent in 2010
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