Inflation data could spur rate increase

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Vietnam may raise policy rates again after April's inflation data, but is likely to hold off following China's footsteps and hike reserve requirements soon, economists and traders said.

Some economists expect the monthly consumer price index to be as high as 2-3 percent in April after rising 2.17 percent in March, pushing annual inflation last month to near 14 percent.

"It's possible the State Bank of Vietnam will raise the refinance rate to 14-15 percent," said a trader at a Ho Chi Minh City-based financial institution.

Faced with some of the highest inflation in the region the authorities have been tightening monetary policy since mid-February. The State Bank raised the refinance rate and the reverse-repo rate, which the central bank uses in open market operations, to 13 percent on April 1.

But inflation has yet to abate, stoked in part by government increases in fuel and electricity prices.

Some experts, including government advisers, have called for an increase in reserve requirements to stamp out inflation, but central bank Governor Nguyen Van Giau has said he would only do so if absolutely necessary.

"People are talking about it, but I think the issue is: Do the banks have excess reserves? Using such a blunt instrument could cause more trouble than it's worth," said Jonathan Pincus, Dean of the Fulbright Economics Teaching Program in Ho Chi Minh City.

Vietnam's banking sector is relatively crowded and the size and health of institutions vary widely, experts say.

"Raising reserve requirements would be a very drastic step," said Alan Pham, economist at VinaSecurities who expects monthly inflation in April to be 1.8 percent.

Further raising interest rates might not have much direct effect, given that lending rates are already much higher than policy rates, and at worst could create cost-push inflationary pressure, he added.

"I think they should wait for all the steps they have taken so far to percolate through the economy and see what happens at the end of Q2," he said.

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