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Vietnam plans to widen the dong's trading band to 2 percent, giving more scope for the currency to gain and slow the fastest inflation in more than 12 years.
Deputy Prime Minister Nguyen Sinh Hung told the central bank to widen the band for the dong from 0.75 percent, according to a directive posted on the cabinet's Web site late yesterday.
Increases in global prices quickened inflation to 15.7 percent in February from a year earlier. Allowing the dong to strengthen would reduce the cost of importing dairy products, cooking oils and petroleum goods.
"Inflation is generally a problem in Vietnam, but it's specifically a problem in food prices, especially imported food, and oil prices," said Matthew Hildebrandt, an economist at JPMorgan Chase Bank in Singapore. "You need to find a way to limit the impact from imported goods."
Consumer prices jumped about 6 percent in January and February alone, "posing great challenges" for the Vietnamese economy, according to the statement. ``Given global prices are set to increase more, this may have a strong impact on Vietnam's socio-economic development," it said.
The timing of the change hasn't been decided yet, Nguyen Van Giau, governor of the State Bank of Vietnam, said by telephone today from Hanoi. The bank has to discuss implementing the directive with the government, he said.
Dong strengthens
Increases in prices of commodities and energy have driven China's inflation to 7.1 percent, an 11-year high, and gains in Indonesia's consumer prices to 7.4 percent, the most in 16 months. Both currencies though have allowed their currencies to appreciate, in contrast with Vietnam, which has a policy of keeping the dong weak to make exports competitive.
The dong strengthened 0.02 percent to 15,922 against the dollar as of 12:25 p.m. in Hanoi, heading for the highest close since April 4, 2006. Vietnam has allowed the currency to add 2 percent in the past six months. The State Bank of Vietnam sets a daily dong rate and allows the currency to trade a fixed amount on either side of that.
Vietnam's year-on-year inflation accelerated to the most since September 1995 last month, after quickening to 14.11 percent in January. Imports rose 64 percent last month, with a 121 percent increase in milk and dairy products, and a 157 percent surge in fat and oil imports.
Bank reserves
JPMorgan Chase Bank expects inflation to average 16.1 percent this year, compared with around 8.5 percent in 2007, and the dong to strengthen about 1 percent, according to Hildebrandt.
Deputy Prime Minister Hung, acting on behalf of Prime Minister Nguyen Tan Dung who is visiting the U.K., also asked the State Bank to consider increasing the amount of reserves that banks have to set aside to reduce liquidity in the economy.
The central bank on Jan. 16 ordered banks to raise the amount of money they keep on reserve to 11 percent from 10 percent, the first increase since June 2007.
The central bank last widened the dong's trading band in December, allowing the currency to end an 11-year run of depreciation.
