Vietnam inflation climbs to 25-month high, adding rate pressure

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Vietnamese inflation accelerated to a 25-month high in March on rising gasoline and power costs, adding pressure for another increase in interest rates.

Prices rose 13.89 percent this month from a year earlier, compared with a 12.31 percent pace in February, according to figures released by the General Statistics Office in Hanoi on Thursday. That's the fastest since February 2009. Prices rose 2.17 percent from February.

Prime Minister Nguyen Tan Dung is aiming to curb credit growth, restrain the budget deficit and tighten monetary policy after shifting the focus to taming inflation from boosting economic expansion. Price gains will likely exceed 14 percent by midyear, driven by a weaker currency and higher fuel and electricity tariffs, Credit Suisse Group AG said this month.

"This is the price they have to pay for doing things so late," said Santitarn Sathirathai, a Singapore-based economist at Credit Suisse. "If they stick to their new course on monetary policy, we'll probably start to see inflation come down toward the end of the year."

Borrowing costs

The State Bank of Vietnam increased its refinancing and discount rates to 12 percent each on March 8, matching the level of the repurchase rate. The monetary authority devalued the dong for the fourth time in 15 months on February 11 to try and curb the nation's trade deficit, risking higher import prices.

Dung aims to keep credit growth at less than 20 percent this year from an earlier target of 23 percent. The government is also seeking to clamp down on the use of dollars and gold to steady the dong.

"There's usually a three- to six-month lag between credit growth and inflation, so we should see price pressures starting to abate from the middle of the year," said Prakriti Sofat, a Singapore-based economist at Barclays Capital. "The policy measures are quite comprehensive, and should help to contain inflation expectations."

The central bank may opt to tighten policy further through steps such as raising reserve ratios on concern that higher interest rates will increase corporate borrowing costs, Credit Suisse's Sathirathai said.

Transportation prices advanced 9.51 percent from a year earlier, Thursday's report showed, compared with a 3.59 percent gain in February. Vietnam raised domestic fuel prices by as much as 24 percent last month. Electricity prices were increased by about 15 percent from March 1.

While the central bank is "finally sending a clear and consistent signal about prioritizing economic stability over growth," further rate increases will be needed to build confidence in the country's monetary policy, JPMorgan Chase & Co. said on March 8.

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