HSBC predicts further OMO rate cut soon

Source: Pano feed

Dinh Duy

In a report released on March 3, the bank said that inflation fell further close to zero. In February, it rose a meager 0.3% year-on-year, a slowdown from an already low January figure of 0.9%.

While this does not raise concerns regarding the health of the economy, as it was primarily due to the sharp drop of transportation costs, the question of a rate reduction looms.

Inflation is likely to hover between 0% and 1% in the next five months before rising to 2.8% year-on-year by the end of this year. Therefore, the central bank can create looser credit conditions by lowering the OMO rate by 50 basic points to 4.5% to lower funding costs, it said.

In addition, even as inflation gradually edges up in the coming months, the favorable base effect and lingering impact of a lower oil price will keep price pressure subdued.

Inflation will gradually trend upward in the second half on higher social spending costs, a potential electricity hike, stronger economic activity and an unfavorable base effect. Thus, in the short term, headline inflation should remain subdued. Even when they rise, they are still expected to remain well within the Government’s target of less than 5% for 2015. The bank forecast year-end inflation would be 2.8% year-on-year, a sharp rise from the current 0.3%.

Explaining the modest OMO rate cut, HSBC said there are plenty of risks for the central bank to be cautious.

Oil prices are volatile. The U.S. Federal Reserve is likely to hike rates this year and coupled with this, demand remains firm and there is an unfavorable base effect waiting in the second half of this year.

The bank said Vietnam has ‘good’ deflation, which means most of the decline is due to an oil supply shock rather than a demand weakness. This means that the economy should feel an income boost in the last six months, as it pays less for oil.

Already, the oil balance turned positive in February and is only marginally negative year-to-date (US$17 million).

Both the fall of input prices and relative labor cost competitiveness has helped the manufacturing sector rising since September 2013. Despite sluggish external demand – new export orders contracted in February – the manufacturing Purchasing Managers’ Index (PMI) inched up to 51.7 in February from 51.5.

HSBC expects output to remain robust as new orders exceed inventories.

Đăng ký: VietNam News