Economic Analysis - SBV To Stay Neutral Amid Growth-Inflation Dilemma - JUNE 2017

BMI View: The SBV is likely to maintain a neutral monetary policy over the coming quarters in order to support growth and balance inflationary pressures amid rising global interest rates. However, we highlight that the central bank's credit growth target of 18.0% is not sustainable over the medium term and could pose downside risks to macroeconomic stability.

We continue to expect the State Bank of Vietnam (SBV) to maintain a neutral monetary policy stance throughout 2017 as it attempts to balance multiple objectives including supporting growth, keeping inflation in check, and stabilising the Vietnamese dong. The central bank is unlikely to tighten its monetary policy as doing so will likely curb credit growth and put further downside pressure on the country's real GDP growth, which already sank to a three-year low of 5.1% y-o-y in Q117. At the same time, there is little room for the SBV to ease any further as domestic price pressures will likely remain elevated and at a time when global interest rates are rising as the US Fed move towards normalising monetary policy. These constraints suggest that the SBV will remain on hold over the coming quarters. That said, we caution that the SBV's credit growth target of 18% in 2017, following a rapid expansion of 18.7% in 2016, is unlikely to be sustainable over the medium-term and poses downside risks to macroeconomic stability.

SBV Will Look To Support Growth Amid External Headwinds...

Likely To Stay Elevated
Vietnam - Inflation, %

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