Vietnam’s CPI inflation fell further to 6.64% y/y in March, compared to February’s 7.02%.
On a monthly basis, the CPI level fell by 0.19% m/m. This m/m drop was partly
due to an unwinding of seasonally high prices during the Tet holidays, but the
key component to note moving forward is healthcare (more below).

All CPI components registered significantly slower sequential gains. The food, beverages & tobacco, and transport
components even registered negative m/m figures.

Importantly, sequential healthcare inflation was low for the second month in a row, at only
0.07% m/m
. With food and demand-side
price pressures having been benign for some time, healthcare has been the main
driver of inflation through most of H2 last year. From July to January,
month-on-month readings for this component have ranged from 3.4% to as high as
17%. But since then, healthcare prices have increased less than 1% m/m.

Given the faster-than-expected moderation of healthcare inflation, we are revising down
our full year inflation forecast to average 6-8% in 2013 from 8-10%.
Further, we see a good chance of headline inflation
ending the year at slightly above 6%.

As such, we are revising our rate call to include one more 100bps rate cut in Q2, with
risks of another cut if economic data deteriorates faster than expected.
The SBV has already expressed a willingness to reduce
rates further if inflation appears on track to end the year at 6%. We now think
this is likely. With domestic growth still grindingly slow and the reforms in
the banking system likely to take some time before credit can flow back into
the economy, we believe a rate cut could help ease some of the constraints on
loan demand.

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