Inflation slows; will central bank cut rate yet again?

Vietnam’s inflation slowed for a third month in November, adding to speculation the central bank may cut interest rates for a fourth time this year to boost economic growth.

Consumer prices rose 24.2 percent from a year earlier, after gaining 26.7 percent in October, according to figures released Tuesday by the Hanoi-based General Statistics Office. Prices fell 0.76 percent from October, after declining 0.2 percent last month for the first time since March 2007.

The government usually releases economic data before the end of the reporting period based on estimates.

Decelerating inflation gives the State Bank of Vietnam more scope to reduce its key interest rate from 11 percent, making it cheaper for companies to borrow. The benchmark VN-Index extended losses this month on concern companies are struggling to keep production up, hurting economic growth.

“Should the inflation rate keep going down, the economy may be faced with deflation, and the central bank will definitely have to cut its key rate further,” said Cao Sy Kiem, head of the Vietnam Association for Small-and Medium-Sized Enterprises, and a central-bank governor from 1989 to 1997.

The government is trying to reignite economic growth after raising rates earlier this year to 14 percent, the highest in Asia. The State Bank trimmed a percentage point off its benchmark rate three times in the month through November 20, prompting commercial banks to lower their lending rates.

Slower growth

The government has revised down its forecast for inflation this year to 22 percent from 24 percent and said the economy would grow 6.7 percent as projected.

It had earlier slashed its growth target for this year to 6.7 percent from 9 percent amid signs recessions in the world’s biggest economies may hurt exports.

It aims to bring inflation below 15 percent next year, when the economy may grow 6.5 percent, according to Prime Minister Nguyen Tan Dung.

Economic expansion may slow to 5.5 percent in 2009 from 6.5 percent this year, Standard Chartered Bank said in research published after the latest interest-rate reduction on November 20. Policy makers will probably cut rates to 9 percent by the second quarter, according to Tai Hui, the London-based bank’s head of Southeast Asian economic research in Singapore.

“The central bank will need to lower interest rates to spur lending to enhance production and businesses,” Kiem said. “Slowing inflation is good for companies in this respect.”

Overseas shipments in the January-to-November period rose 34 percent to $58.5 billion, slowing from growth of 37 percent in the first 10 months, the General Statistics Office in Hanoi said Monday.

Inflation has slowed from 28.3 percent in August, the fastest pace since at least 1992, after the government raised interest rates and restricted lending.

Vietnam should keep lowering interest rates next year and manage the exchange rate flexibly in the face of a worsening global economy, PM Dung told parliament earlier this month.

Domestic demand

“Slowing consumer prices are generally quite good, since the government has still set fighting inflation as an important task for the year,” said Le Dang Doanh, a senior research fellow at Vietnam’s Institute of Development Studies in Hanoi. “However, there are some concerns about slowing inflation, because it shows in part that domestic demand is falling.”

Easing inflation may hurt earnings of farmers and exporters who imported materials when costs were high and now have to sell their products at lower prices, said Doanh, a former senior economist at the Ministry of Planning and Investment.

Food and foodstuff inflation eased for the fifth consecutive month to 37.6 percent year on year, in line "with lower food commodity prices around the globe over the last few months," HSBC economist Prakriti Sofat said.

Housing and construction inflation dropped to 14.7 percent versus 22.8 percent last month while transportation and communication also slowed to 19.3 percent from a peak of 26 percent in September and 24.8 percent in October.

Food, housing and construction costs and transportation and communication are three main components of the price basket.

Most other components saw increases, but the pace has moderated over the last two months, Sofat said.

The statistics office said average consumer prices in the first 11 months were 23.25 percent up from the same period last year, above the average annual rise of 23.15 percent in the first 10 months.