VNStockNews.com - Louis Taylor, CEO of Standard Charter Bank Vietnam said that inflation is the major challenge for Vietnam in 2011 and maintaining high interest rate for a certain time is necessary.
Talking about the recent exchange rate adjustment of the State Bank of Vietnam (SBV), Taylor said that although the time SBV applied new exchange rate had been forecasted, the adjustment level is greater than they expected. The adjustment would help balance the balance of payments and lower the pressure on foreign reserve reduction. However, the devaluation of dong against dollar seems to also increase inflation since it would increase prices of imported goods. Therefore, it is important that management agencies should continue implementing other measures after the dong devaluation to curb inflation.
Sharing his opinion on how the recent exchange rate adjustment would affect inflation while the government targets to stabilise macro-economy and control inflation at expected level of about seven percent this year, Taylor said in addition to positive effects, the recent exchange rate adjustment of SBV would also create a number of factors which could pull up inflation in the coming months, especially when the increase of global commodity prices is included. State authorities have taken action to tighten monetary policy to curb inflation and protect the dong. The recent interest rate increase of SBV is a necessary action to combat inflation. Moreover, other measures are needed to encourage the use of dong, instead of using dollars or gold.
Lending rate in Vietnam is relatively high (at 18 to 19 percent per year), and is considered not reasonable for businesses.
Assessing the possibility of an interest rate adjustment in the near future and the impact of the recent exchange rate adjustment on lending rate, Taylor said interest rate in Vietnam is still high, at any standard. Nevertheless, to curb inflation, interest rates must be kept at high level in a certain time, and the length of time depends on the level of market confidence. SCB Vietnam thinks interest rate might not go down in the second quarter.
Giving assessments on the possibility of an adjustment of dollar/dong exchange rate in the near future, Taylor said, in SCB Vietnam's view, Vietnam is likely to be under the pressures of balancing the balance of payments,, high inflation and credit growth target throughout 2011. The confidence building also takes time, and SCB Vietnam predicted that there might be another exchange rate adjustment in the second half of this year. However, if the positive actions conducted by the state agencies could be strengthened by measures to encourage the use and holding of dong, the pressure to adjust exchange rate would be lowered. At that time, those measures would gradually create confidence for the use of dong and the pressure of dong devaluation could even be reversed.
