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ANZ Bank Forecasts 8.9% Inflation in Vietnam   2008-02-16 - VNS

ANZ Bank is adhering to an optimistic prediction for Vietnam’s inflation rate by the end of the year, projecting a year on year rise in prices in 2008 of 8.9%.

Food prices in January jumped nearly 4% against December.

ANZ Bank is adhering to an optimistic prediction for Vietnam’s inflation rate by the end of the year, projecting a year on year rise in prices in 2008 of 8.9%.

"We do expect the headline CPI figure to moderate from March, peaking at 14.8% in February 2008 to fall to 13.5% by June and 8.9% by year’s end," an ANZ Bank economist wrote in a report published on Wednesday.

Last month, inflation spiked to an astonishing 14.11% year on year.

The bank analysts relied on three ongoing, global trends as well as the nation’s fiscal and monetary policies in making the prediction.

The acceleration in food prices was expected to ease, they predicted. Global food prices were likely to remain elevated, but the pace of price rises should level out. A slowing in external demand was also expected to reduce pressure on globally traded agricultural commodities.

The appreciation of the dong against the US dollar was also likely to soften the prices of imported goods. The dong has already moved to around VND15,960 to the dollar, the strongest the currency has traded at since mid-2006.

Higher interest rates and capital reserve requirements and bond yields were also predicted to reduce liquidity in the economy further ease inflationary pressures.

With Vietnam’s discount rate of 6.0% below the rate of inflation, real interest rates were negative.

"Higher interest rates would be appropriate for an economy growing at more than 8% per annum with an inflation rate above 10%, but we do not expect the State Bank to move aggressively to raise rates given its track record in this area," economists Amy Auster and Amber Rabinov wrote in the ANZ Bank report.

A key risk was that the Government would go for growth over price stability, even though inadequate steps to tame inflation and stabilize prices might do greater damage to the economy over time.

The Government has targeted growth of 9% this year, faster than last year’s 8.5% growth rate. While productivity gains were contributing to GDP growth, capacity constraints were also emerging to slow growth including emerging inadequacies in the labor market, infrastructure and energy.

Retail sales were continuing to grow rapidly, at 20% per year on average over the past three years, a factor that, combined with high liquidity in the economy, would encourage inflation.

"What is required is for the economy to slow a bit while productivity-enhancing reforms continue, including advances to the prudential regulation of the banking system to reduce any vulnerability to falling asset prices," the report said.

"While the SBV has taken some appropriate measures on inflation, we believe more will be required to put the inflation genie back in the bottle."

Dr Vo Tri Thanh, director of the international economic integration department of the Central Institute for Economic Management, concurred with the ANZ Bank analysis but demurred with their conclusion.

"I doubt about the prediction about a single-digit inflation rate by the end of the year because investment capital inflows into Vietnam are a greater complicating than stated in the report," Thanh told Vietnam News in a phone interview yesterday.

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