New Hopes with Inflation Signals

Vietnam’s Consumer price index (CPI) climbed 0.82 percent in September, the second month with a growth under 1 percent and the lowest in the year, said the Ministry of Planning and Investment. Moderating inflation drove the year on year growth of 23.02 percent in August to 22.42 percent in September. However, inflation growth accrued 16.63 percent this year - a rate that challenges the completion of the inflation growth target of 18 percent this year which has been revised twice from 15 percent and 17 percent because it is very hard to keep the price growth within the remaining room of less than 1.4 percent in the last three months of the year.

 

This fanned concerns that the monetary policy will continue to be tightened in the coming time after it was loosened in a prudential manner.

 

The Asian Development Bank (ADB) forecast Vietnam’s CPI stood at 18.7 percent in 2011 before easing to 11 percent in 2012. The lender’s forecast is slightly higher than the target of the Vietnamese Government.

 

Analysts at Thang Long Securities Joint Stock Company (TLS) projected that CPI will moderate from now through November before rallying in December and reach 20 percent this year. Therefore, "the tight monetary policy will be favoured by the State Bank of Vietnam (SBV), at least through this year,” said Luu Hai Yen, an analyst at TLS.

Although there are different forecasts about inflation for the remaining time of the year, easing inflation in the past two months has boosted hopes for lowering interest rates and realising commercial banks’ commitment for rate cut, particularly after the State Bank of Vietnam has actively supported their liquidity. As the monetary policy is clung to a prudent approach, TLS argued that the central bank will support liquidity of commercial banks on the one hand and closely control credit supply on the other.

After withdrawing VND3,000 billion net from the open market operations (OMO) market two weeks ago, the central bank immediately pumped VND4,000 billion net into the market last week, with each day added nearly VND1,000 billion net. Together with this move, the State Bank raised the term on the OMO market for the first time in months to 14 days and retained the interest rate of 14 percent per annum. Analysts at Bao Viet Securities Company (BVSC) said this move helped illiquid banks to balance their capital sources and avoid short-term disturbance.

 

Yield rates on the G-bond market also raise hopes on lower lending rates at banks. Remarkably, the volume and percentage of bonds sold have increased continuously while coupon rates have eased from 12.14 percent to 12.05 percent per annum for three-year bonds and from 12.14 percent to 12.10 percent for five-year bonds. TLS noted that positive CPI data will drive down bond coupon rates in the coming time.

 

“Improved liquidity of the banking system and rate cut expectations boost the purchasing demand,” said BVSC. In reality, when the regulations on ceiling deposit interest rate of 14 percent per annum are controlled closely, lending rates have been brought down to 17 - 19 percent. Thus, lowering coupon rates on bond markets are understandable. As some bidders offered coupon rates at 12 percent, the demand is forecast to keep rising in the coming time.