Economic activity drastically dropped.
According to DBS, challenging economic conditions call for careful calibration in the current monetary easing cycle. GDP growth for the first quarter eased further to 4.9% YoY, from 5.5% in the previous quarter.
In fact, economic activity has slowed drastically in recent quarters on the back of the earlier monetary tightening.
The State Bank of Vietnam hiked policy rates drastically by 700 bps in the one year period between Oct10 to Oct11 in a bid to cool the economy and to rein in a runaway inflation. Inflation at that time reached a peak of 23% in Aug11.
The refinance rate has been lowered to 8.00% while the discount rate has been shaved to 6.00% last week. This came ahead of expectation but it is probably supported by a more than expected easing in the headline inflation reading.But for the most part of last year, the central bank has been on an easing cycle due to slowing growth momentum. It cut interest rates by a total of 600bps in 2012 alone.As it is, the state bank is under tremendous pressure again. The sharper than expected weakness in 1Q13 GDP growth has prompted the central bank to cut rates further by 100bps.
March CPI inflation moderated to 6.6% YoY, from 7.0% in Feb13. Sequentially, a decline of 0.2% MoM sa has been recorded, in contrast to a hike of 1.3% in the preceding month.
This is in line with our expectation that the recent (Jan-Feb) pick-up in inflation is mainly due to demand pull factors during the Tet New Year season.
Such price pressure is usually transient in nature and inflation should ease in the coming months. Nonetheless, it is undeniably true also that the easing in inflation came sharper than expected. That by itself provides the window for SBV to cut rates further.
However, the economy has a poor track record in terms of its inflation targeting ability. Premature or too aggressive easing will most likely spark another bout of high inflation.
History has already repeated itself twice in this regard. With that, while we expect the authority to lower policy rate by another 100bps towards the end of the year, we certainly hope that the policy rates will remain where they are for now to ensure that real policy rates remain in the positive territory.
Ultimately, controlling inflation remains key to ensuring economic stability in Vietnam.