Vietnam’s central bank will probably raise its benchmark interest rate this year to the highest among 16 regional economies, according to HSBC Holdings Plc.
The State Bank of Vietnam’s key rate is currently 8 percent, having been raised from 7 percent effective Dec. 1. The rate is now lower than Pakistan’s 12.5 percent and Sri Lanka’s 9.75 percent.
Vietnam is set to bypass both countries by mid-year as its central bank tries to stem accelerating inflation and firm up the nation’s currency, according to a report released today and written by HSBC economists Frederic Neumann and Robert Prior- Wandesforde. The central bank’s policy rate will probably reach 12 percent by the fourth quarter, the London-based bank predicted.
“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 said. “For policy rates, we expect the biggest percentage-point hikes in the base rate over the coming year in Vietnam, India and Indonesia.”
Other economies whose policy rates are covered by the report include Australia, China, Hong Kong, Japan, Malaysia, New Zealand, the Philippines, Singapore, South Korea, Taiwan and Thailand.
Vietnamese inflation may reach 12 percent by the second quarter, HSBC predicted. The country’s year-on-year rate in December was 6.5 percent, the fourth straight month that the General Statistics Office in Hanoi has reported a higher figure.
‘More of a Problem’
“Inflation is set to become more of a problem as higher oil and food prices feed through to the headline rate,” wrote
Singapore-based Prior-Wandesforde. Vietnamese inflation should reach at least 10 percent by the second quarter “if not earlier,” he said in the report.
A “rapid deterioration” from a first-quarter trade surplus in 2009 to monthly deficits exceeding $1 billion put pressure on Vietnam’s currency, HSBC said. In December, Vietnam reported a trade deficit of $1.3 billion, pushing the shortfall for the year to $12.25 billion, based on preliminary figures.
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 dong is currently trading at 18,469 per dollar, down from 17,483 at the end of 2008. The central bank devalued the dong in November, while also 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.
