[HO CHI MINH CITY] The slowing pace of inflation in Vietnam since January will give the country’s central bank further room to lower borrowing costs to support struggling businesses, said analysts on Monday (May 29).

The consumer price index (CPI) rose 2.43 per cent year on year in May, compared to 2.8 per cent a month earlier, according to estimates by the General Statistics Office (GSO) in Hanoi. The continuation of this downward trend now means that headline inflation is at its lowest level since March 2022.

On a month-on-month basis, the CPI for May went up only slightly – by 0.01 per cent, the lowest in three years. This was mainly due to increases in the price of food, electricity and water, and halted a decline seen in the previous two months.

In April, Maybank revised Vietnam’s headline inflation forecast for 2023 to 3.4 per cent from 4.3 per cent previously, as it believes a slowing economy may cool inflation by more than expected.

Analysts say the easing inflation shows that retailers are cutting prices to stimulate domestic demand. Consumer spending, however, is likely to slow down for the rest of the year due to high borrowing costs, rising living expenses and an unfavourable job outlook.

The central bank also reduced its refinance rates from 5.5 per cent to 5 per cent, and its overnight electronic interbank rate from 6 per cent to 5.5 per cent. These moves were made to help businesses and households have better access to credit, said SBV.

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Le Xuan Dong, the head of market research and consulting services at financial data platform FiinGroup, said the rate cuts were “necessary but not sufficient” to spur economic growth.

“There was a concern that accommodative monetary policies might lead to asset speculation instead of buoying the manufacturing sector, given that production activities to serve global orders is unlikely to pick up significantly any time soon,” he said.

Exports contract again

Vietnam’s exports contracted for a fourth month this year. Exports fell by 5.9 per cent in May, and imports declined by 18.4 per cent.

Earlier this month, Standard Chartered lowered its 2023 growth forecast for Vietnam to 6.5 per cent from 7.2 per cent previously, due to the uncertain external environment. And last week, Maybank economists said that Vietnam’s growth was likely to fall significantly short of the government’s official target of 6.5 per cent.

FiinGroup’s Dong noted that with foreign investment remaining weak and domestic consumption growth likely to ease, there is a need for more robust fiscal policies, such as greater public spending and more attractive tax policies to spur economic growth.