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Vietnam Business » Vietnam Economic News » Small CPI increases result of proper monetary policy

Small CPI increases result of proper monetary policy

Vietnams three hottest issues - inflation, trade deficits and budget overspending - have cooled. Appropriate financial policies helped, but the last months of 2010 may challenge this balance. The July consumer price index (CPI) increased 0.06 percent over June, the lowest rise since April 2009, and the lowest for a July in the last seven years.

Because of low CPI increases in July and the previous three months, the 7-month CPI rose only by 4.84 percent over the end of December 2009, the third lowest level in comparison with CPI increase of the same periods in the last seven years. This is really good news, giving people more reason to believe that the 2010 CPI increase will not exceed eight percent. If Vietnam can obtain a GDP growth rate of 6.5-6.8 percent for the year, then it will have attained a "double target": curbing inflation and high economic growth. Low inflation is most wanted by consumers, because it can narrow the gap between actual and nominal income. Most consumers are producers as well, therefore, they do care about GDP growth and the trade deficit, but they care more about inflation, because the rate directly affects their income. Consumers with low incomes are more interested in inflation and price performance, especially prices of essential goods. The food price is one example. Per capita food consumption by low income earners is higher than high income earners, while the proportion of money spent on food and drink by low income earners is also higher. Inflation has been curbed in the first seven months of 2010 mainly because of food price decreases. After rising at Tet, food prices have been dropping since March. July was the fifth consecutive month with food price declines, which has dropped by 5.77 percent if compared to those in July and in February, or generally 1.18 percent per month. According to Dau Tu newspaper, curbed inflation is the result of proper monetary policies, especially on interest rates. After high inflation in the first three months, monetary policies were tightened. Since the beginning of the second quarter, the State Bank has allowed negotiation-based interest rates (banks and lenders can negotiate rates) instead of the ceiling interest rate plan (the rate must not rise above the ceiling set by the State Bank). Cooling CPI, financial experts believe, will make the State Bank feel more secure in loosening monetary policies. With low CPI increases, depositors can enjoy real positive profit, because deposit interest rates are higher than the inflation rate. Banks are now trying to ease interest rates, because deposit interest rates are not higher than profits gained through other investment channels. When lending interest rates go down, businesses can access bank loans easier, thus allowing increased production and GDP. Financial experts warn that the Government must still watch inflation. There is high investment, production and consumption demand, and, if the dong/dollar exchange rate is not stabilized, inflation may grow in the last months of 2010.

Vietnam Business And Financial News Network. Source [english.vietnamnet.vn]

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