Vietnam to Raise Benchmark Rate to 12% by Q4: HSBC Says

Vietnam’s central bank will probably raise its benchmark interest rate to 12% by the fourth quarter in an effort to stem accelerating inflation and firm up the nation’s currency, HSBC economists forecast.

 

“With the trade deficit and inflation both rising sharply and the dong under downward pressure, the government needs to tighten the purse strings significantly,” HSBC economists Frederic Neumann and Robert Prior- Wandesforde wrote in a report released yesterday.

 

 “For policy rates, we expect the biggest percentage-point hikes in the base rate over the coming year in Vietnam, India and Indonesia”, they said.

 

Currently, the central bank maintains the base interest rate at 8%, up 1% percentage point is a step in the right direction but there are plenty more increases to come. We are looking for another 400bps of hikes before the end of 2010” Prior-Wandesforde wrote in HSBC report.

 

While higher rates will help cap the trade deficit, it will take “some months yet, given the time it typically takes for policy to impact domestic demand,” Prior-Wandesforde wrote.

 

The HSBC economists also predicted Vietnamese inflation to reach 10.1% by end 2010. “Inflation is set to become more of a problem as higher oil and food prices feed through to the headline rate. We continue to expect a combination of adverse base effects and higher commodity prices to see inflation return to double digits by 2Q10, if not earlier.” Prior-Wandesforde said.

 

A “rapid deterioration” from a first-quarter trade surplus in 2009 to monthly deficits exceeding US$1 billion put pressure on Vietnam’s currency, HSBC said.

 

The dong is currently trading at VND18,469 per dollar, down from VND17,483 at the end of 2008. The central bank devalued the dong in November while adjusting the band from which the currency is permitted to trade from a daily reference rate to 3 percent from 5 percent previously.

 

“Downward pressure on the dong, which is trading at the weak side of the new band, is likely to remain fairly intense,” Prior-Wandesforde wrote.

 

In the same report, HSBC also gave some key predictions for 2010 including GDP growth rate at 6.8%; private consumption at 5.8%; fixed investment at 8%; industrial production at 15%; CPI at 10.1%; current account balance at -13.3% of GDP, trade balance at -14.8% of GDP, and dollar exchange rate at 18,400. (HSBC, Macro Asian Economics First Quarter 2010)