Vietnam Inflation Hits 14-Year Low, Interest Rates Remain High

Tuan Minh

10:38 24/12/2015

BizLIVE - Vietnam’s consumer prices have increased 0.6% in 2015 from a year earlier, marking the lowest reading since 2001.

Vietnam Inflation Hits 14-Year Low, Interest Rates Remain High

Vietnam's inflation has hit 14-year low in 2015.

Vietnam’s consumer price index (CPI), a measure of inflation, has risen 0.6% in 2015 from 2014, the lowest level on an annual basis over the past 14 years, the government-run General Statistics Office (GSO) has said.
The reading is far below the 5% target set for the year by the National Assembly, the country’s supreme legislative body.
Vietnam’s low inflation can be ascribed to the government’s good price management and low prices of commodities, especially food and energy, economists have said.
The country’s core inflation [the food and foodstuff, energy and state-controlled services are excluded from the basket for CPI calculation], however, was at 2.05%, compared to the average inflation of 0.63%.   
The government-run office added that the CPI has edged up an estimated 0.02% in December from November. The index has mainly pulled down by a 1.57% month-on-month decline of the price of transport services, due to consecutive cuts in fuel prices.
Le Tien Dong, vice general director of Artex Securities, told BizLIVE that low inflation could enable the State Bank of Vietnam (SBV), the country’s central bank, to keep interest rates at low levels and loosen the money supply to support economic growth. Credit growth this year could exceed 18%, above 12.5% and 12.6% in 2013 and 2014, respectively.
Prolonged and low inflation indicates the strengthening of the domestic currency, the dong, which helps reduce pressures on the USD/VND rate.
Mr. Dong, however, pointed out ‘negative’ effects of low inflation. Consumer prices are flat while credit expansion is fast, suggesting that the local economy still faces certain hindrances.
Faster core inflation shows that “the low CPI has been caused by cyclic and abnormal factors, rather than internal factors of the economy,” he said, warning that inflation could return in 2016 on the back of the recovery of commodity prices.
He predicted that the SBV would switch its focus from restructuring banks and cleaning up bad debt to increasing lending in a healthy way. Low inflation could also allow the local monetary authority to manage interest rates and the forex rates flexibly.
Although inflation has reached a decade-low, annualized interest rates for short-term loans are common at 6.8%-9% while those for medium- and long-terms hove between 9.3%-11%, according to SBV data.
High borrowing costs in Vietnam are higher than neighboring countries such as China and Thailand, which undermines local firms’ competitiveness, according to experts.