Vietnam advances in curbing Asia's fastest inflation

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Vietnam is making headway against Asia's fastest inflation as prices rise the least in 11 months, an easing that may boost confidence in its economic policy making as the nation struggles to spur foreign investment.

Consumer prices climbed 16.44 percent in February from a year earlier, the General Statistics Office said in Hanoi on Friday. Pledged foreign direct investment in Vietnam fell 54.5 percent to $1.23 billion in the first two months of 2012 from a year earlier, the Foreign Investment Agency of the Ministry of Planning and Investment said separately.

Easing inflation provides scope for the central bank to cut interest rates, after it signaled last month that it may lower borrowing costs to "more suitable" levels. The government rolled out the so-called Resolution 11 strategy to tame prices, restrain credit growth and stabilize the currency a year ago, constraining its ability to loosen policy even as Europe's debt crisis hurt Asian economies.

"It shows that Vietnam has been quite effective in tightening policy not just through interest-rate movements but also by administrative measures," said Trinh D Nguyen, a Hong Kong-based economist at HSBC Holdings Plc. "We expect the State Bank of Vietnam to lower rates by the end of this quarter or the beginning of the second quarter. Inflation will probably go down to single digits by year end."

The Ho Chi Minh City Stock Exchange's VN Index rose as much as 1.3 percent before closing little changed on Friday. It's climbed 20 percent this year, the best performance in Asia, while the Vietnamese dong has gained about 1 percent against the US dollar.

Fastest inflation

The nation still has the fastest inflation among 17 Asia- Pacific economies tracked by Bloomberg, and consumer prices rose 1.37 percent this month from January.

The central bank last cut the repurchase rate in July and the refinancing rate in 2009, even as policy makers from Indonesia to the Philippines have reduced borrowing costs to shield growth. While cooling price pressures may provide scope for the central bank to cut interest rates, oil costs pose a threat that may delay monetary easing, according to Standard Chartered Plc.

"The immediate threat to the inflation outlook is still moderate, but one new factor that has come in recently is higher oil prices," said Tai Hui, the Singapore-based head of Southeast Asian economics at Standard Chartered. He expects Vietnam to cut rates in the first quarter, with a possible delay to the second quarter should price pressures remain elevated.

Australia's rates

Elsewhere in the Asia-Pacific region, Australian central bank Governor Glenn Stevens said Friday the country's benchmark interest rate is "about right for the moment" as economic growth is close to trend and concerns ease that Europe's debt crisis will disrupt global output.

Singapore's industrial production fell the most in eight months in January as factories reduced output during the Lunar New Year holiday and demand for electronics eased, a report showed Friday. Manufacturing slid 8.8 percent from a year earlier.

In the US, purchases of new homes probably rose in January to a nine-month high, more evidence the housing market is improving, economists said before a report on Friday. Sales, tabulated when contracts are signed, climbed 2.6 percent to a 315,000 annual pace, according to the median estimate in a Bloomberg News survey of 77 economists.

The Thomson Reuters/University of Michigan final index of consumer sentiment fell to 73 in February from 75 a month earlier, according to the median in a separate Bloomberg survey. The preliminary reading for this month was 72.5.

UK contracts

The UK economy shrank 0.2 percent last quarter from the previous three months, according to the median of 36 estimates in a Bloomberg News survey ahead of a report due Friday. German gross domestic product probably contracted by the same pace, a separate survey showed.

Vietnam's central bank signaled last month that it may cut rates to "more suitable" levels after the first quarter and this month, Prime Minister Nguyen Tan Dung ordered the central bank to "solve" within the first quarter a shortage of funds among lenders and to closely monitor the market in order to reduce lending interest rates to appropriate levels.

Disbursed foreign direct investment was $1 billion in the first two months of the year, a drop of 9 percent from the same period in 2011, according to the foreign investment agency.

Pressure to ease

"There is now pressure to ease monetary policy as growth remains moderate and inflation continues to fall," Hai Pham, a Singapore-based analyst at Australia & New Zealand Banking Group Ltd., said before the inflation report.

Europe's debt crisis has hurt Asian exporters from Singapore to Taiwan. Gross domestic product in Vietnam, a manufacturing site for companies such as Intel Corp., grew 5.89 percent in 2011, down from 6.78 percent the previous year.

Still, the International Monetary Fund and the World Bank have said the country must guard against loosening monetary policy too soon.

Price gains this year have been driven by the Lunar New Year holiday in January and an electricity price increase in December. The Finance Ministry this week eliminated import tariffs on gasoline, cut taxes on diesel and kerosene, and ordered fuel retailers to keep prices of petroleum products "stable" in a bid to check inflation.

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