Cong Minh
HSBC Global Research explained in its report dated July 19 that inflationary pressures had elevated due to the recent fuel price hike, potential rise in public service costs and cost pressures caused by the recent dong devaluation.
Fuel retail prices increased again in Vietnam last week, the third time in just more than one month, hitting a record high of over VND24,570 per liter of petrol and VND22,310 a liter of diesel oil.
In late June, the central bank raised the inter-bank exchange rate of Vietnam dong from VND20,828 to VND21,036 to the dollar. As the average inter-bank exchange rate had been kept unchanged for one and a half years, this adjustment is aimed to better reflect foreign currency supply and demand, thus stabilizing the foreign exchange market.
Interest rate for terms less than one month on the interbank market on Monday was still high, at 5.5%-6% while the rates were a bit lower at longer terms, suggesting that banks were in a need of short-term capital.
The dong weakness coupled with higher fuel costs suggests headline inflation will likely surge to 7.1% year-on-year in July from 6.7% in June, says HSBC Global Research in the report.
The good thing is dampened domestic demand and a favorable base effect may push inflation lower towards the end of the third quarter. Yet, upside risks to inflation remain.
The Government may be motivated to raise public service costs given the weak budget revenue.
Commodity prices may increase due to an expected acceleration of global growth in the final quarter. Therefore, further rate reductions will likely stoke up inflationary pressures, the bank said.
“With core inflation in the double-digits and headline inflation expected to accelerate in July, the SBV has limited room to cut rates further. We expect rates to stay steady, if not move higher, from now on,” the report says.
In the report, HSBC remarks the SBV was trying to ease liquidity conditions by reducing interest rates.
The SBV last Friday lowered the open market operation (OMO) rate by 50 basis points, from 6% to 5.5%. In the year to date, the rate has been brought down by a cumulative 150 basis points, from 7% at end-2012.
The latest OMO rate cut is likely intended to ease the liquidity crunch, which caused overnight interest rates to rise to its highest level this year, HSBC Global Research suggests. Due to limited liquidity, overnight interest rates have shot up in recent days and hit the record high.
“We believe today’s move is rather reactionary to recent credit conditions and rates are unlikely to be lowered further. With a rising interest rate environment globally, the lowering of the OMO rate could trigger outflows, further exacerbating the liquidity crunch, and possibly push term rates higher,” says HSBC Global Research.
The OMO offer volume may ease some of the liquidity squeeze, but it will hardly solve the fundamental issues surrounding Vietnam’s meager credit growth, according to the report.
Đăng ký: VietNam News
