In the first four months of this year, the inflation rate climbed to 5.4% while the National Assembly had targeted 5%. Inflationary pressure is continuing say some economists.
Vo Tri Thanh, vice director of the macroeconomic analysis department under the central economic management institute commented that while the rate inflation is climbing, in such a transforming economy as Vietnam, an inflation rate of 6–7% is not worrying. Nevertheless, what is notable here is that inflationary pressure accompanied with a big trade deficit cause people to believe that dong will further depreciate.
“With the US presidential election this year and although the American economy has good prospects with some signs of increase in inflation, there is no clear possibility for a stronger greenback and an increase in interest rates on the US dollar. This also means pressure on a stronger dong depreciation is reduced,” reasoned Thanh.
Answering a question by Thanh Nien Newspaper whether the State Bank of Vietnam will increase dong interest rates to control inflation, Nguyen Dong Tien, director of the monetary policy department under SBV said “This matter has been under consideration”. But he added that any increase in dong interest rates would impact the target of achieving an economic growth rate of 7.5–8% in 2004 and 2005.
“Due to the inflation rate, raising capital in dong by banks is slower than ever before. However due to close control over lending, a dong shortage has not occured”, said Nguyen Hoa Binh, vice director of Vietcombank. However, Binh admitted that demand for dong is high. Presently, the deposit interest rate for one-year terms in dong of Vietcombank is 7.2% a year or 0.6% a month. With an inflation rate of 5.4% recorded in the last four months, the real interest rate in dong stands at just 1.8% a year compared with the US dollar interest rate of 1.9% a year. Considering this and the fact that the dong has depreciated against the US dollar by about 1.5% this year, it is likely that there will be a rush to switch dong holdings in personal accounts to US dollars. So the questions is whether the SBV will cut US dollar deposit rates in the near future or not to stop that happening or whether the SBV will nudge up dong deposit rates.