The Standard Chartered Bank has revised its inflation forecast for Vietnam from 11.5 percent to 9.5 percent this year, after seeing lower inflation rate in the recent months.
"We are pleasantly surprised by the tame inflation thus far in the first half of 2010, with month-on-month inflation staying between a very benign range of 0.1 percent to 0.3 percent for the past three months," Tai Hui, Singapore Regional Head of Research of the bank, said in a statement.
The stable inflation rate of recent months has also prompted the central bank and the government to try and lower interest rates. The State Bank of Vietnam has announced that major local banks have agreed to reduce the dong lending rate to between 12 percent and 12.5 percent in July, from the current 14 percent.
Reduced pressure on the Vietnamese dong to depreciate also bodes well for managing imported inflation, Tai Hui said.
"However, we remain watchful for signs of two sources of inflation," Tai Hui said.
The first is domestic inflation, because strong retail sales and industrial production could fuel inflationary pressure in the months ahead; and the second is commodity prices, given that the current stability can disappear if risk appetite returns, driving the US dollar lower and commodity prices higher.
"Hence, we acknowledge the current benign inflation environment but remain vigilant for the potential uptick in inflation in the second half of 2010," Tai Hui said.
Vietnam should be able to pursue an expansionary monetary policy without stoking inflation in part due to "contained pressures from commodity prices," Matt Hildebrandt, an economist at JPMorgan Chase & Co. in Singapore, told Bloomberg. Inflation slowed for a third month in June to 8.69 percent.