The State Bank of Vietnam is "unlikely" to cut rates further due to inflationary pressures after a recent hike in gasoline prices and a devaluation of the dong, HSBC said.
The recent weakness in the dong against the dollar coupled with higher fuel prices suggest that headline inflation was likely to rise to 7.1 percent year-on-year this month from 6.7 percent in June, the bank said.
"The room to cut rates further has narrowed."
The central bank devalued the dong last month for the first time since 2011. It weakened the dong's reference rate by 1 percent to 21,036 per dollar on June 28 to "improve the balance of payments and increase foreign-exchange reserves."
It has made eight cuts to the refinancing rate since the start of 2012 to spur lending as the economy expanded at the slowest pace in more than a decade last year. The rate is now at 7 percent.
The price of 92-RON, the country's most popular gasoline variety grade, was up 1.9 percent to an all-time high of VND24,570 per liter on July 17.
Consumer prices rose by 0.27 percent this month from the previous month, five times faster than the pace in June.
Inflation this year has risen to 2.68 percent, and the government hopes to keep it at 6.5-7 percent for the whole year.
HSBC forecast low domestic demand to push inflation down towards the end of the third quarter, but said an upward risk would remain.
On July 19 the central bank lowered the repurchase rate, also known as open market operations rate, to 5.5 percent from 6 percent and injected VND7 trillion (US$330 million) into the OMO.
HSBC saw these as attempts to ease a liquidity crunch.
The establishment of the Vietnam Asset Management Company to clean up bad debts was delayed, but HSBC does not expect the company to be a panacea for the high levels of non-performing loans.
The economy grew 4.9 percent in the first half of the year. The HCM Stock Exchange's benchmark VN Index has gained 21 percent this year to 506.16 as of July 22.
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