Policy on hold for Tet; inflation in focus later

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Vietnam celebrates its lunar new year holiday this week and the focus when markets reopen on Tuesday, Feb. 8, will be the possibility of a dong devaluation and inflation, which holds the key to interest rates.

Vietnam's annual inflation rate hit a two-year high of 12.17 percent in January, when the consumer price index rose 1.74 percent from December.

The central bank raised its base rate to 9 percent from 8 percent in November, but some economists and the International Monetary Fund have suggested rates should go higher to fight inflation.

However, Governor Nguyen Van Giau was quoted by a local news website as saying the central bank could cut the base rate if monthly inflation eased in February to around 1.4 percent.

Businesses are complaining about high bank lending rates of around 18-20 percent, and the government has asked the central bank to look at ways to bring interest rates down.

Some analysts said lower rates were possible after Tet, the largest annual festival in Vietnam, when demand often pushes consumer prices higher.

"We expect the rate cut to be delayed for around a month after the easing in inflation, which means it may take place in March," Bao Viet Securities Co said in a report.

Tong Minh Tuan, manager for economic analysis at BIDV Securities Co., also said the central bank could cut rates after Tet, although he stressed that depended on the CPI.

The authorities may also have to take hard decisions on the currency after Tet.

The dong has been trading on the unofficial market outside its official band against the dollar for four months.

The authorities said in November there would be no devaluation until Tet at least, but that has effectively created a dual rate system that is bad for business, with a gap between the official and unofficial dollar exchange rates that now stands at about 7 percent.

However, the exchange rate has been strongly supported recently by overseas remittances flowing into the country ahead of Tet, said Le Xuan Nghia, deputy director of the National Financial Supervisory Commission.

"There is no need for the central bank to adjust the foreign exchange rate," he said.

The dollar loans that businesses have rushed to take out -- and then swap for dong -- to take advantage of the gap between dong and dollar lending rates have also eased pressure on the exchange rate, said Tuan at BIDV Securities Co.

But he added: "In the next three or four months, when those dollar loans fall due, pressure on the exchange rate will surge, and then a devaluation is likely."

The State Bank of Vietnam has left the dong reference rate at 18,932 per dollar, the rate that has held since Aug. 18, until the end of Tet, although the market had widely expected it to devalue the currency before the holiday.

"After Tet the government will examine the foreign exchange rate more carefully because the rate relates to many other issues," Nguyen Xuan Phuc, a newly elected member of the Communist Party's Politburo and head of the government office, told reporters on Friday.

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