The General Statistics Office (GSO) says the May CPI is slowing down a little bit compared to April’s 3.32%, but it still lifts the annualized inflation to a galloping 19.78% from last May.

The GSO, which usually calculates the CPI after the first 22 days of each month, says 10 of 11 items in the basket of commodities used to calculate the CPI have increased in price this month. The highest price increase is reported in housing and building materials while the prices of foods and foodstuffs are up by 3.01%.

Given the current CPI, experts say this year’s inflation should hover in the range of between 15% and 19%, meaning it will far exceed the revised target of 12.5% let alone the original target of 7%.

Nguyen Minh Phong from the Hanoi Institute for Socio-Economic Development Studies, observed that if the Government is determined to take all measures including monetary and fiscal tightening policies, the CPI this year by the end of this year could be harnessed at 15%. However, Phong admitted that “it is not easy to curb the consumer price index at this level.”

Meanwhile, Fiachra Mac Cana, managing director and head of research of Hochiminh City Securities Co. (HSC), told the Daily that the CPI of less than 19% by the end of this year would be almost impossible mathematically.

HSC’s research shows that Vietnam’s year-on-year CPI growth can peak at 21% by August and then ease to 19% by the year’s end.

“In my opinion, the forecasted CPI of 19% for this year is still so low,” he remarked.

Given the high CPI in May, experts raise the question whether the central bank should increase the reserve requirement for banks as another step to tighten money supply to tame inflation.

Mac Cana likened the required reserve ratio to the brake in a car, so if the central bank wants to stop the car quickly, it must apply the brake. At this time, the central bank has just released the accelerator, he added.

“The central bank must reduce money supply by increasing the reserve ratio though it will have severe consequence on some small banks. And we have to accept that this is the price we have to pay to get rid of the problem of inflation and currency depreciation. There is no other choice,” Mac Cana said.

Le Tham Duong, head of Business Management Faculty at the HCMC Banking University, said a compulsory reserve increase would be chosen as a last resort by the central bank. If this tool was used at this time, it would create big impact on banks, especially smaller ones which are coping with the liquidity crunch, he said.

“If the reserve requirement is raised now, the central bank must accept to sacrifice some small banks. Under such a circumstance, the central bank should have specific policies to support small banks to ensure its liquidity,” Duong added.

Mac Cana suggested that the central bank increase the required reserve ratio for Vietnam dong from the current 3% to 6% or 7% as soon as possible.

Earlier Le Xuan Nghia, vice chairman of the National Financial Supervisory Committee, said that if the central bank resorted to a higher reserve requirement, it should reconsider Circular 13 that rules the loans to deposit ratio of each bank at no more than 80%. This suggestion is also supported by Mac Cana.

Source: Saigon Times.