* More policy rate hikes needed in face of inlation -IMF
* Confidence in govt policies "fragile" -IMF
* C.bank "must" raise rates if very high inflation persists
By John Ruwitch and Tran Le Thuy
HA TINH, Vietnam, June 9 Vietnam must raise
interest rates further if high inflation persists, a central
bank official said on Thursday, as the International Monetary
Fund urged Hanoi to take a tougher stance against soaring
Confidence in the government's policies was "fragile", the
IMF said, and it was essential that the government send "a
strong signal" that it will remain committed to macro-economy
stabilising measures beyond 2011.
"The immediate challenge will be to respond to the upward
trend in inflation, and prevent it from feeding into higher
inflation expectations and putting pressure on the dong. This
requires further increases in policy rates," the Fund said in a
report prepared for a semi-annual meeting of international
donors and government officials.
Vietnam's inflation rate is among the highest in the world.
Inflation quickened to 19.8 percent in May over the same month
last year and is still accelerating as a monetary overhang,
hikes in state-mandated power and petrol prices and higher food
prices work their way through the economy.
Economists and investors worry that policymakers in Hanoi
will ease up on their inflation battle once price pressures
begin to abate and turn their focus back to ramping up economic
growth, potentially laying the foundation for another bout of
Responding to the IMF's comments, deputy central bank
governor Nguyen Van Binh told Reuters: "I think if inflation is
still very high in the forthcoming period of time (then) of
course in order to contain inflation I think we must raise
policy rates of the State Bank."
He said the policy rate "may be a little bit higher" than
the government's new inflation target of 15 percent.
"If the situation is cooling a little bit I think it's a
chance for us to keep policy rates the same," Binh added.
Vietnam is committed to following policies to stabilise the
economy into next year and even 2013, Deputy Prime Minister
Nguyen Sinh Hung said on Thursday, adding that the result may be
economic growth below 7 percent until 2014.
He said he expected gross domestic product growth in 2012
and 2013 to be 6-7 percent, which was below the target for the
coming five years set at a Communist Party congress in January
of 7-8 percent. If the economy can attain stability, then GDP
growth could rise above 7 percent again in 2014, he said.
Johanna Dee Chua, head of Asia Economics and Market Analysis
for Citigroup Global Markets Asia, said Hung's comments were
like "music to my ears".
"A strong signal is good because it anchors expectations,"
she said. "It's also good for the stability of the dong."
The government has raised interest rates several times since
late last year, lowered credit growth and money supply targets
and made commitments to cut spending and boost state revenues.
It also has trimmed its GDP growth targets twice and raised its
inflation expectations for this year.
The Vietnamese economy grew 5.3 percent in 2009 and 6.8
percent last year.
But the IMF said the economy still faced "significant
ANZ said in a report on Wednesday it expected policy rates
to be raised by another 100 basis points. HSBC said in a report
on Tuesday more rate hikes were in the pipeline, including a 300
basis point rise in the refinance rate to 17 percent this year.
The reverse repo rate for open market operations currently
stands at 15 percent, the refinance rate is at 14 percent and
the discount rate is 13 percent.
The World Bank echoed the IMF's concerns in a report on
Thursday, saying efforts to stabilise the economy were only half
"The authorities need to remain vigilant against premature
withdrawal of stabilisation measures," it said.
After a cabinet meeting last week the government said it
expects GDP growth in 2011 of 6 percent and inflation of 15
The IMF noted that the Vietnamese currency has been trading
within its band, and said foreign exchange reserves had started
to rise, and were $13.5 billion in May, up $0.9 billion.
The Asian Development Bank reported in April that
Vietnam's foreign exchange reserves last year dropped 12 percent
from 2009 to $12.4 billion and were enough to cover just 1.9
months of imports at the end of 2010.
Hung said the currency would remain stable through the
rest of the year and the government might be able to rebuild
forex reserves to a targeted 16 months of imports next year. It
had added about $2 billion in recent months, he said.
But the IMF cautioned that expectations that the dong
will again come under pressure remained "entrenched".
On Feb. 11 the State Bank of Vietnam devalued the dong
by 8.5 percent, narrowed its trading band against the
dollar. It was the third devaluation in a year.
The beleaguered currency, which had shed more than 20
percent of its value in the three years leading up to the latest
devaluation, has been largely stable recently.
(Additional reporting by Tran Le Thuy; Editing by Kim Coghill)