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Vietnam’s Inflation Accelerates to Fastest Pace in 28 Months

Vietnams Inflation Accelerates
A woman sells vegetables along the street in the Old Quarter of Hanoi, Vietnam. Photographer: Justin Mott/Bloomberg

Vietnam’s inflation accelerated to the fastest pace since 2008, putting pressure on the government to tighten policy further after almost doubling a key interest rate in less than six months.

Consumer prices climbed 17.51 percent in April from a year earlier, according to figures released by the General Statistics Office in Hanoi today. The rate is the highest since December 2008 and compares with the 13.89 percent pace last month. Prices rose 3.32 percent in April from March.

Policy makers have boosted the repurchase rate to 13 percent from 7 percent in November and cut the target for 2011 credit growth to tame inflation and regain investor confidence in the government’s ability to prevent the economy from overheating. Still, food and commodities make up a large share of household spending and increases in gasoline and power costs will fuel inflation, Standard & Poor’s said this month.

“Inflation shows little signs of responding to monetary and fiscal austerity just yet,” said Bill Stoops, chief investment officer at Ho Chi Minh City-based fund manager Dragon Capital. “Government policies to slow inflation operate with a lag effect.”

The inflation rate may peak at almost 20 percent before easing to about 13 percent by year-end, according to U.K.-listed Vietnam Property Fund Ltd., which is managed by Dragon Capital.

Vietnam’s central bank raised borrowing costs for the second time in less than a month on April 1, when the refinancing rate was increased to 13 percent from 12 percent. The repurchase rate was raised to the same level.

Policy Rate

The repurchase rate at which the central bank performs open market operations is Vietnam’s key policy rate, according to Santitarn Sathirathai, a Singapore-based economist at Credit Suisse Group AG, which expects an increase to 14 percent by the end of the year.

Further rate increases may boost debt burdens, Sathirathai said in a research note. Market lending rates are as high as 21 percent, according to Vietnam Property Fund.

“This concern will put a cap on how high the State Bank of Vietnam is willing to raise interest rates, forcing them to use other tools to tighten monetary policy,” he said, citing quantitative controls on credit and money growth.

Vietnamese inflation isn’t solely a result of global influences, with strong domestic demand, expanded monetary supply and a weaker dong all contributing, Sathirathai said.

A government decision to allow power prices to be adjusted as often as every three months depending on market conditions may signal a further increase in electricity prices of as much as 40 percent in June, according to Viet Capital Securities. Electricity prices were increased by about 15 percent in March.

“According to the Ministry of Finance, the most recent adjustment was insufficient to fully adjust to market rates,” Marc Djandji, head of research for Viet Capital, said in an April 18 note.

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