Vietnamese authorities shouldn’t reduce interest rates this year as the nation’s economy needs more time to recover from “excesses” such as high inflation and a growing trade deficit, HSBC Holdings Plc said.

The State Bank of Vietnam has increased the benchmark lending rate three times this year, with the last increase to 14 percent taking place in June. The central bank is likely to cut the base rate if inflation slows for “a couple more months,” Ho Chi Minh City-based fund managers Dragon Capital said last week.

“We do not think it is time for the government to change its policy stance,” Prakriti Sofat, an economist at HSBC in Singapore, wrote in a note dated last Friday. “It’s important that the central bank keeps the base rate at 14 percent for some time and for the government to maintain tight fiscal policy.”

Vietnamese inflation slowed in September for the first time since January 2007, with the year-on-year rate at 27.9 percent compared with 28.3 percent in August. The trade deficit widened through September at a slower pace than through August, based on preliminary figures from the General Statistics Office in Hanoi.

While the trade deficit is stabilizing and the pace of price increases has probably peaked, “inflation expectations are running high,” Sofat wrote.

“Slow growth is what the country needs,” she said in the note, arguing that the full impact of higher interest rates hasn’t been felt yet.

Growth rate

Nguyen Xuan Phuc, chairman of the Government Office, was quoted by local media Monday as saying the country’s economic growth may slow to 6.5-6.7 percent this year.

The National Assembly in June cut the target for growth this year to 7 percent, from as much as 9 percent previously.

The government’s top priorities were controlling inflation and the trade deficit, the Vietnam Investment Review cited Phuc as saying.

Inflation for the full year may be 25 percent while the trade deficit may reach $19 billion, according to the newspaper, without specifying if the inflation figure was year-on-year or average.

The “most difficult period” for the Vietnamese economy has passed, and the government “can think about higher growth” now, said Cao Viet Sinh, a deputy minister of planning and investment, according to the newspaper.

If HSBC is accurate in forecasting that interest rates won’t be cut this year, the Ho Chi Minh City Stock Exchange’s VN-Index will probably stay around 450 for the rest of 2008, wrote Garry Evans, an equity strategist at HSBC in Hong Kong. The index Monday dropped 4.1 percent to fall below the 450 level for the first time in two weeks, closing at 433.71.

“The economic situation in Vietnam remains difficult,” Evans wrote. High interest rates are “always a negative for equities,” he said in a note to clients.

Source: Bloomberg

Update from: http://www.thanhniennews.com/politics/?catid=1&newsid=42620