Standard Chartered experts expect the central bank to further cut interest rates in the third quarter. — Photo vietstock.vn

HA NOI (Biz Hub) — The State Bank of Viet Nam (SBV) is likely to maintain pro-growth bias in the coming months and drastic structural reforms remain critical to the nation's recovery, according to a recent Standard Chartered (SC) report.

The SBV cut the refinancing rate from 8 per cent to 7 per cent last month – the eighth rate cut in the current easing cycle and the second cut this year – on the back of easing inflation pressure and sluggish economic growth at the beginning of the year.

"We see a possibility of another rate cut of 50 basic points in the third quarter if authorities remain comfortable with the inflation outlook and credit growth stays anaemic," SC analysts said.

In April, the month-on-month inflation rate turned negative for the first time in three years, with consumer price index (CPI) inflation stabilising at 6.6 per cent year-on-year.

The analysts said they expected inflation risks to re-emerge later than they had previously predicted, revising down their inflation forecast from 8 per cent to 7.2 per cent for this year and raising the forecast from 6 per cent to 8.2 per cent for next year.

They added that inflation remained on an uptrend and risks would return in the fourth quarter amid rising food and energy prices and minimum wage hikes.

Credit growth reached 1.4 per cent in the first four months, higher than the March level but still short of the Government's 12 per cent target for 2013. This sluggish credit uptake could be due to high interest rates, experts speculated.

"The central bank is likely to reduce the cap on the deposit rate further if it judges that the recovery in business activity is too slow," SC experts said.

Early last month, the National Financial Supervisory Commission suggested that the Government prioritise growth for the remainder of the year after economic data for the first four months suggested a slow start.

"Some people regard high interest rates as the main hurdle preventing Viet Nam's economic recovery. But in our view, accelerating the pace of structural reforms and reviving the property market are more important than monetary easing to boost business activity and growth momentum," the experts said.

They noted that lower deposit rates wouldn't necessarily boost lending, and flush liquidity in the banking system suggested that banks still found managing operations and resolving non-performing loans difficult.

The SBV is considering capping lending rates, which now range between 9 per cent and 15 per cent, to spur loan demand. The Government plans to cut the corporate income tax rate from 25 per cent to 22 per cent in July.

Prime Minister Nguyen Tan Dung has adopted the establishment of a national asset management company, which aims to resolve bad debts in the banking sector.

SC analysts said these measures were likely to help businesses and the market, but reforms had progressed slowly this year.

The International Monetary Fund recently cut its 2013 gross domestic product (GDP) growth forecast for Viet Nam from 5.8 per cent to 5.2 per cent, signalling the importance of following through on reforms.

"Restructuring the State-owned enterprise sector and reviving the real estate market will be key to achieving sustainable growth in the long run," the analysts said. — VNS