The State Bank of Vietnam (SBV) announced that it will cut its policy rate by another 100bps, in line with our forecast. Specifically, the refinance rate has been cut to 7.00% from 8.00%.This follows a cumulative 700bps of cuts since mid-2012, with the most recent cut being 100bps in late March. The SBV’s discount rate follows, falling to 5.00% from 6.00%.

The rate cuts will become effective from 13 May 2013.

In our last Emerging Asia Monthly we argued that the lower inflation trajectory has given the SBV space to ease monetary policy further. Vietnam’s domestic economy has been buffeted by the negative feedback between slow domestic growth, tight loan supply due to high levels of bad debt in the banking system, and weak credit demand from households and businesses. As such, growth is below potential, so demand pull price pressures are virtually non-existent. Food prices have also been very stable. The recent fall in global commodity prices has shifted the inflation outlook further down over the coming months. Our measure of inflation momentum (the 3m/3m saar), which is a good leading indicator of the trajectory of headline inflation, confirms this.

Click here for more information.