Vietnam's central bank grapples to fight inflation

The central bank will maintain a prudent monetary policy, enhance monetary policy coordination with proactive fiscal policy and aim for reasonable credit growth, said Nguyen Duc Long, deputy head of the State Bank’s Monetary Policy Department.

Vietnam’s central bank is facing a monetary policy dilemma as the country’s economy slows down and inflation speeds up.

Vietnam is determined to reach its annual economic growth target of 6.7 percent this year. However, adverse weather conditions have dragged the country’s growth down to an estimated 5.52 percent in the first half of this year.

Meanwhile, inflation in the first six months of this year is estimated to have risen 1.75 percent against the same period last year, according to the data from the General Statistics Office.

The office also said that the consumer price index in June had increased 2.4 percent from last June.

Vietnam’s inflation started picking up in May to the highest increase in the past five years.

More importantly, although food accounts for 42.8 percent of the 19 goods and services the country uses to calculate consumer inflation, it is not largely to blame for the hike because 11 of the commodities are rising, said a statistics official.

The average prices of prescription drugs and medical services have jumped after the Health Ministry decided to raise health care fees at public hospitals.

Soaring prices for medicine and other medical services have caused inflation in the first half of this year to rise by 0.86 percent, data showed.

Experts forecast that inflation will continue to rise in the final months of 2016 when public schools raise tuition fees for the 2016-2017 academic year which is set to start in two months time. Last year the Ministry of Education and Training proposed an annual increase of 10 percent to tuition fees at public universities by 2020.

Increased tuition fees have accounted for 0.22 percent of the overall rise in inflation in the first half of this year.

Moreover, world oil prices are climbing back up, putting mounting pressure on retail petrol in the domestic market.

And the central bank’s policy to spur credit growth to 17.3 percent last year compared to the target of 15 percent in 2015 is expected to be factored into the consumer price index in the final months.

In response, the central bank will proactively and flexibly regulate monetary and fiscal policies in order to control inflation and spur credit growth, said Nguyen Duc Long.

The central bank also confirmed that it will continue to follow a flexible exchange rate regime by setting the official mid-point rate of the Vietnamese dong against the U.S. dollar on a daily basis and curbing dollar hoarding.

The central bank has so far this year managed to lower interest rates, stabilize the exchange rate between the Vietnamese dong and the U.S. dollar, increase foreign exchange reserves and keep the inflation rate under control, said Long.

He added that credit growth in the first six month rose by 8.16 percent from the end of last year, higher than the 7.86 percent recorded in the same period last year, which is in accordance with the annual target of 18-20 percent.

Experts said the central bank should channel credit growth into the manufacturing sector rather than the real estate and stock markets where speculation is rife.