Vietnam rate cut to boost 2012 inflation, Credit Suisse says

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Vietnamese inflation will be higher next year than previously forecast as a result of a central bank rate cut this week that was "premature" and may confuse investors, Credit Suisse Group AG (CSGN) said.

The State Bank of Vietnam on July 4 lowered its repurchase rate to 14 percent from 15 percent. The cut was the first this year for the repurchase rate, which was 10 percent in January. The repurchase rate appears to have become Vietnam's benchmark for monetary policy, JPMorgan Chase & Co. (JPM) said in March.

Vietnamese inflation accelerated in June to 20.82 percent, the fastest since 2008. The government plans to keep a tight monetary policy in place at least until the end of this year, Minister of Planning & Investment Vo Hong Phuc said on June 9. The International Monetary Fund said on the same day that the central bank should further increase its rates to fight inflation and avoid putting pressure on the Vietnamese dong.

"The decision to cut the rate is premature, and risks sending a confusing signal to the market," wrote Santitarn Sathirathai, a Singapore-based economist at Credit Suisse, in a research note Friday. "The decision reflects the government's long-standing bias in favor of growth over stability, which caused the current high inflation and trade deficits in the first place."

Inflation by the end of next year may now reach 10.1 percent, up from Credit Suisse's previous end-2012 forecast of 8.7 percent, the Swiss bank predicted. Inflation at the end of 2011 will probably be about 16 percent, according to Credit Suisse, which didn't change its previous forecast for this year's pace of price increases.

"˜Policy reversal'

The repurchase rate may now fall to 12 percent by year-end, instead of increasing to 16 percent as Credit Suisse previously anticipated, the bank said.

"Monetary policy works with a lag," Santitarn wrote. "The impact of this policy reversal should be visible in the growth and inflation data next year."

Vietnamese economic growth may accelerate to 6.2 percent next year from 5.8 percent this year, Credit Suisse said. The country's gross domestic product expanded 6.8 percent in 2010. The economy grew 5.57 percent in the first half this year, down from 6.18 percent in the first half of 2010, the General Statistics Office in Hanoi said on June 29. Growth in the second quarter alone was 5.67 percent.

"The latest round of macro indicators, including second- quarter gross domestic product, already pointed to early signs of a demand slowdown," Santitarn wrote. "It is premature to conclude from these data that the tightening measures have worked and hence justify the rate cut, especially when inflation is yet to peak."

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