Last week, the State Bank decided to extend the 7 per cent base rate to seven consecutive months. With that base rate level, the market interest rate will still be capped at 10.5 per cent, per year. Local lenders in Vietnam are allowed to mobilise and lend at rates within 1.5 times of the State Bank’s monthly base rate.

“The adjustment of the base rate is normally made in tune with inflation and economic growth. Though inflation risks are looming, it seems that the authority opted not to lift the base rate to support economic growth,” said Huynh Quang Tuan, Asia Commercial Bank’s (ACB) deputy general director.

HSBC economist Prakriti Sofat did not share this view, saying that it was hard to argue that the State Bank would simply stand by, especially given its recent history of movements, though the bank could still keep the base rate at 7 per cent till the end of the year.

“It has already moved to cap credit growth for the year from 30 to 25 per cent previously and to cut interest rates on compulsory dong deposits. We think such quantitative controls will continue and the central bank will raise the base rate by 2 per cent in the first half of 2010 versus our previous expectation of a 1 per cent total hike in the second half of 2010,” said Sofat.

Vietnam’s headline inflation has reduced by 25 per cent over the last 10 months, after having increased by some 20 per cent in the previous 12-month period. The latest inflation report was 3.3 per cent year-on-year in July. “We think it will head a bit lower in August, as last year’s fuel price hike drops out of the annual comparison. But after that, we expect it to rise steadily,” Sofat said.

According to Vietnam’s General Statistics Office, gross domestic product (GDP) growth picked up from 3.1 per cent in the first quarter to 3.9 per cent in the first half of the year. This implied that year-on-year GDP growth in the second quarter alone was 4.5 per cent, well higher than the 3.1 per cent level seen in the first quarter of 2009. Sofat said that the bottom had now been hit and the only way to go was up, as the huge monetary and fiscal stimulus package flowed through. She also predicted at least 6 per cent year-on-year GDP growth by the end of 2009 and 7 per cent by the end of 2010.

However, over the past few weeks the authority has become concerned with the fast-rising credit extension boosted by the government’s 4 per cent bank loan interest subsidy programme, under which nearly $20 billion worth of loans have been extended. This has seen overall credit growth of 17 per cent from levels at the end of 2008.

“History shows that credit growth typically leads inflation by one to two quarters, which suggests that inflation should start picking up in September,” said Sofat. HSBC’s forecast was that inflation would zoom up rapidly, hitting 9 per cent by the end of the year and 13 per cent by the end of first quarter in 2010.
 
Source: VietNamNet/VIR