Vietnam’s easing inflation gives central bank room for further rate cuts

• May 30, 2023

[HO CHI MINH CITY] The slowing pace of inflation in Vietnam since January will give the country’s central bank further room to lower borrowing costs to support struggling businesses, said analysts on Monday (May 29).

The State Bank of Vietnam (SBV) bank has already cut its key policy rates three times this year alone.

The consumer price index (CPI) rose 2.43 per cent year on year in May, compared to 2.8 per cent a month earlier, according to estimates by the General Statistics Office (GSO) in Hanoi. The continuation of this downward trend now means that headline inflation is at its lowest level since March 2022.

Meanwhile, core inflation – which strips out the costs of food, fuel, healthcare and education services – stood at 4.54 per cent in May.

On a month-on-month basis, the CPI for May went up only slightly – by 0.01 per cent, the lowest in three years. This was mainly due to increases in the price of food, electricity and water, and halted a decline seen in the previous two months.

Overall, average consumer prices in the January-May 2023 period rose 3.55 per cent from a year earlier. The government has said that it aims to cap inflation for this year at 4.5 per cent.

In April, Maybank revised Vietnam’s headline inflation forecast for 2023 to 3.4 per cent from 4.3 per cent previously, as it believes a slowing economy may cool inflation by more than expected.

Analysts say the easing inflation shows that retailers are cutting prices to stimulate domestic demand. Consumer spending, however, is likely to slow down for the rest of the year due to high borrowing costs, rising living expenses and an unfavourable job outlook.

With inflation seemingly under control, SBV last Thursday continued its pro-recovery stance by cutting interest rates for the third time this year.

The central bank also reduced its refinance rates from 5.5 per cent to 5 per cent, and its overnight electronic interbank rate from 6 per cent to 5.5 per cent. These moves were made to help businesses and households have better access to credit, said SBV.

Le Xuan Dong, the head of market research and consulting services at financial data platform FiinGroup, said the rate cuts were “necessary but not sufficient” to spur economic growth.

“There was a concern that accommodative monetary policies might lead to asset speculation instead of buoying the manufacturing sector, given that production activities to serve global orders is unlikely to pick up significantly any time soon,” he said.

Exports contract again

Vietnam’s exports contracted for a fourth month this year. Exports fell by 5.9 per cent in May, and imports declined by 18.4 per cent.

Overall, the country’s exports from January to May shrank 11.6 per cent compared to the same period last year to US$136.2 billion. Imports contracted by 17.9 per cent over the same five-month period from a year earlier to US$126.4 billion, underlining the slowdown in economic growth.

Gross domestic product expanded by 3.32 per cent in the first quarter, down from 5.92 per cent in the previous quarter and 5.02 per cent in the first three months of 2022.

Earlier this month, Standard Chartered lowered its 2023 growth forecast for Vietnam to 6.5 per cent from 7.2 per cent previously, due to the uncertain external environment. And last week, Maybank economists said that Vietnam’s growth was likely to fall significantly short of the government’s official target of 6.5 per cent.

FiinGroup’s Dong noted that with foreign investment remaining weak and domestic consumption growth likely to ease, there is a need for more robust fiscal policies, such as greater public spending and more attractive tax policies to spur economic growth.

Source: https://www.businesstimes.com.sg/international/asean/vietnams-easing-inflation-gives-central-bank-room-further-rate-cuts