Advantages and challenges of inflation control

03-Jan-2014 Intellasia | Thoi Bao Ngan Hang | NDH | 6:00 AM Print This Post

At the conference to carry out the missions of the banking sector, prime minister Nguyen Tan Dung confirmed that macroeconomic stability and inflation control are crucial issues for the country’s sustainable development and missions directly related to the banking sector. In a talk with local newspaper Thoi Bao Ngan Hang, director of the Banking Strategy Institute under the State Bank of Vietnam said that the SBV’s implementation of monetary policy and fiscal policy in 2014 will have many advantages but there are pressures arising from other guidelines of government agencies.

In your opinion, what are the advantages?

The country controlled inflation of 2012 and 2013 was successful when the country’s consumer price index of 2013 only increased 6.04 percent, fulfilling lower inflation target than 2012 (6.81 percent). This is the lowest inflation level in recent ten years. Thus, Vietnam’s inflation movement in two recent years has escaped from the rule of “2 highness and 1 lowness” (inflation level reached 12.63 percent in 2007, 19.89 percent in 2008, 6.52 percent in 2009, 11.75 percent in 2010 and 18.13 percent in 2011).

Low inflation in two consecutive years will create favourable preconditions to control inflation at target level in 2014 and economic restructuring and growth model transformation.

This result largely comes from the renewal for operating mode of monetary policy of the SBV in recent years. Of which, the SBV has increased the activeness to lead the market that is an advantageous factor to decide the efficiency of inflation control. Besides, as forecasted, in coming time, a downward trend in commodity prices in general will continue to take place for all commodity groups, including oil.

According to the IMF’s forecast, the energy price index will decrease by 3 percent in 2014 and food prices will decrease about 6 percent due to stable weather condition and a more abundant supply. According to the WB’s forecast, world commodity price in 2014 and 2015 will be no big changes. Of which, energy prices will decrease 1 percent in 2014 and 0.8 percent in 2015 and prices of non-energy commodities will fall 0.3 percent in 2014 and 0.9 percent in 2015.

Can challenges make inflation control mission unfeasible, sir?

The difficulty comes from the economy’s internal factor. According to macro policy direction in 2014, to reach a growth rate of 5.8 percent, one of necessary requirements is to continue to support aggregate demand and promote economic growth. It means that role of monetary policy and fiscal policy in 2014 will continue to promote more efficiency in the support of the production sector to create a strong repulsion, leading to changes of this area compared to 2013. Yet, to carry out this role, pressures for monetary policy are very great when the monetary policy controls inflation, supplies capital and remove difficulties for enterprises to boost production.

A notable point is that pressure from food commodity increased sharply. If inflation 2012 is mainly dominated by non-food commodity, the inflation 2013 also faces food commodity’s pressure.

It can be seen that CPI of food commodity has increased sharply since July 2013 and lasted continuously until the end of the year. Thus, ending 2013, food commodity increased 5.08 percent, much higher than 2012 (1.01 percent). In contrast, non-food commodity tended too low down, at only 6.47 percent, much lower than the previous year (11.9 percent). Thus, weather situation is not favourable for farming and planting of agricultural products, pressure of food price increase will be very great, which will impact on CPI increase.

The economy’s opening level is greater and greater, how will this issue affect inflation control?

This factor cannot be ignored in inflation control. In 2014, recovery of the domestic economy and the world economy will help the country expand the market but import can increase again. Furthermore, instability of current account balance will face challenges when Vietnam’s export structure does not have necessary changes and still depends on export good, which causes pressure on the supply and demand of foreign currency and the stability of the VND/USD.

Although, world prices are forecasted to have a downward trend in 2014, there will have complicated developed when the political turmoils are still booming in many countries and the supply of some commodities, especially oil becomes scarce. The world economy is forecasted to be able to recover actually in 2014 and domestic demand in economies will recover, which can be factors to create pressures for goods price increase and inflation increase due to pushing cost factor in Vietnam in 2014.

To effectively control inflation 2014, we need to clearly see forecasts of more difficulties than advantages. Monetary policy management should further promote flexibility and activeness in coordination and use of monetary policy tools, interest rate management and exchange rate in accordance with economic macroeconomic developments, especially the CPI’s developments and we must continue to deal with dollarisation and goldenisation of the economy.

We need to carry out credit management measures towards credit expansion and credit quality control. Besides, it is necessary to have close coordination with other macroeconomic policies, especially fiscal policy, improve efficiency from the budget’s investment capital use, ODA capital and other investment capital sources to control inflation, stabilise the macro economy and support the growth at a reasonable level.


Category: Economy

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