Vietnam inflation slows, central bank signals rate-cut scope

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Vietnam's inflation slowed for a third month in November, and the central bank signaled it may consider lowering interest rates.

Consumer prices rose 19.83 percent from a year earlier, after climbing 21.59 percent in October, the General Statistics Office said in Hanoi Friday. The State Bank of Vietnam has room to cut policy rates and lower the dong deposit rate cap if month-on-month inflation is less than 1 percent, Governor Nguyen Van Binh told lawmakers Friday. Prices rose 0.39 percent in November from October.

Vietnam's inflation remains the highest in a basket of 17 Asia-Pacific economies tracked by Bloomberg, compounding risks to economic growth from a trade deficit and a faltering global recovery. Neighbors Indonesia and Singapore have eased monetary policy in recent weeks to shield expansion, as the impact of Europe's sovereign-debt crisis saps demand for Asian exports.

"The temptation to cut rates is always there when they see inflation falling but it's still very high," said Gareth Leather, an economist at Capital Economics Ltd. in London. "That might lead to more downward pressure on the currency. I think they've really got to stick it out on rates for at least another six months or so."

Inflation priority

The Vietnamese government prioritized the fight against inflation in February by ordering tighter monetary and fiscal policies to stabilize the economy. The State Bank of Vietnam raised its refinancing rate last month to 15 percent from 14 percent. Commercial lending rates in 2011 have climbed as high as 27 percent, according to the World Bank.

Cutting policy rates at this stage would be a "mistake," Masato Miyazaki, a division chief in the International Monetary Fund's Asia and Pacific department in Washington, said in a telephone interview this month during a visit to Hanoi.

The benchmark VN Index of stocks slipped 1.8 percent Friday, its biggest decline in two months. The dong was unchanged at 21,009 against the dollar, according to data compiled by Bloomberg. The stock index has declined about 21 percent this year, and the currency is down about 7.2 percent in the period.

Vietnam's economic growth slowed in the first three quarters of 2011, expanding 5.76 percent, compared with 6.54 percent in the same period in 2010.

Slowing sales

Some companies that depend on the Vietnamese market for sales are feeling the impact of slower economic growth. Vietnam Industrial Investments Ltd., an Australian-listed steelmaker, said it has sold half as many products this month as it had expected.

Prices in the category including construction-materials rose 0.12 percent in November from October, the inflation report on Friday showed.

"There's oversupply in the market and not enough demand, and when that happens you can't really increase prices," Alan Young, chief operating officer of Vietnam Industrial, said in a telephone interview Friday from Hanoi.

Vietnamese exports rose to $8.6 billion in November from $8.39 billion last month, the Statistics Office said in a separate report Friday. Exports in the first 11 months of the year climbed 35 percent to $87.2 billion. The country posted a $700 million trade deficit in November.

"The bias now, particularly with the global economy slowing and the potential negative impact on key export markets, would be for policy makers to look for ways to ease pressure on businesses," Ashok Bhundia, a fixed-income strategist at Bank of America Merrill Lynch in Hong Kong, said before the release. "Inflation will remain high but the trajectory is improving, and that will give them some cover to hold or lower rates."

Food prices

Overall food prices increased 28.04 percent from a year earlier. The sub-component that includes rice prices climbed 22.82 percent from a year ago and 3.25 percent from a month earlier.

Farmers in Vietnam have been hoarding rice, expecting prices to gain in part due to a Thai government price-guarantee program introduced last month, said Chookiat Ophaswongse, the Bangkok-based honorary president of the Thai Rice Exporters Association. Thailand's worst floods in almost 70 years are also driving expectations of higher Vietnamese rice prices, he said.

Inflationary pressures may increase next year as power tariffs rise. Vietnam may raise electricity prices by about 4.6 percent from current levels in 2012, Minister of Finance Vuong Dinh Hue told the National Assembly in Hanoi Friday.

"Even though inflation has eased slightly, it's still pretty crippling," said Nick Axford, head of Asia Pacific research for property company CBRE Group Inc. in Hong Kong. "At the same time the picture is getting bleaker in Europe, and the government in Vietnam is trying to protect growth, so they are caught between a rock and a hard place."

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