Inflation Accelerated to 26.8% in June

Vietnam's consumer prices accelerated for a 16th month in June, suggesting the central bank may need to increase interest rates further to cool inflation that is running at the fastest pace in Asia.

Consumer prices gained 26.8% from a year earlier, the biggest jump since at least 1992, from a rate of 25.2% in May, according to figures released by the General Statistics Office in Hanoi today. Prices rose 2.1% from the previous month.

Viet Nam's interest rates are already the highest in the region after the central bank increased borrowing costs three times this year. Faster inflation is adding pressure on the government to take more steps to prevent surging global food and energy prices from worsening living conditions for the country's 85 million people.

``Viet Nam's consumer prices aren't going to go down very quickly,'' said Sebastien Barbe, a Hong Kong-based strategist for the investment banking unit of France's Credit Agricole SA. ``Inflation will remain in double digits for several quarters. We expect them to increase interest rates further, by another 2 percentage points.''

Record oil and commodity prices are fuelling inflation around the world. Crude reached $139.89 a barrel on June 16, while prices of grains such as rice, corn, wheat and soybean reached unprecedented levels in 2008.

Food, Rice

Food prices jumped 74.3% in June from a year earlier and 4.3% from May, the statistics office said. Prices in a broader food category that includes rice rose 45.6% from a year earlier.

The government, which has made fighting inflation its priority, on June 3 cut the economic growth target for this year to 7% from 9% as it tries to slow price gains. Viet Nam is aiming for 2009 growth of as much as 7.5%, according to a statement posted on the government's Web site June 7. Growth quickened to 8.5% last year, the fastest in more than a decade.

Prime Minister Nguyen Tan Dung has pledged to tame inflation as he seeks to restore investor confidence after the nation's benchmark stock index lost more than half its value this year.

Inflation ``will be brought down to a one-digit figure in 2009 or early 2010,'' Dung, 58, said in an interview with Bloomberg Television in Washington late yesterday.

The government, which caps gasoline prices to keep fuel affordable for Vietnamese, won't raise fuel costs in June and will take into account global crude levels when deciding on any increase in July, Finance Minister Vu Van Ninh said on June 15 at the World Economic Forum on East Asia in Kuala Lumpur.

Capital Controls

The State Bank of Viet Nam weakened the dong by 2% on June 11 to prevent currency speculation and raised interest rates to 14% from 12% to cool inflation.

Stocks in the Southeast Asian nation have slumped almost 60% this year, the world's worst performance, and the dong is set for its biggest drop since 2001, falling 3.8%.

Vietnam's ``extensive'' capital controls and the management of its currency will prevent overseas investors from fleeing the nation even as inflation accelerates and economic growth slows, Ping Chew, the Singapore-based head of Asian sovereign and corporate ratings at Standard & Poor's, said last week.

The central bank announced today that it will widen the trading band for the dong. Starting tomorrow, the currency will be allowed to trade up to 2 percent on either side of a daily reference rate the central bank sets for the dong against the dollar, from 1 percent now.

S&P was the first of three ratings companies to lower Vietnam's credit outlook to negative, saying the country's overheating economy was a risk to stability.

Prices in the category that includes construction materials jumped 23.7% in June from a year earlier and 1.9% month-on-month. Prices in the category that includes transportation climbed 14.9% year-on-year. (Bloomberg)