Inflation Targeting and its Applicability in Vietnam

This opinion was revealed from the research on “Inflation Targeting and Implications to Monetary Policies in Vietnam” by a group of authors: To Thi Anh Duong, Bui Quang Tuan, Pham Sy An, Duong Thi Thanh Binh, and Tran Thi Kim Chi (Vietnam Institute of Economics).

 

Carried out in the framework of the "Support for capacity building for advising, examining and supervising macroeconomic policies" project led by the National Assembly Commission for Economic Affairs and financed by the United Nations Development Programme (UNDP), the research was released on December 19, 2011 together with two other reports on exchange rates and financial supervision indicators.

 

Mr Nguyen Van Phuc, Deputy Director of the National Assembly Committee for Economic Affairs and Head of the project, said: “These are the three hottest macroeconomic matters in Vietnam at present. I hope that the results of the project will not be left on the shelf, but will be translated into the policymaking process,” he said.

 

In the inflation targeting research, the authors assumed that keeping low and stable inflation should become a primary goal of monetary policies to ensure macroeconomic stability and improve the effectiveness of economic structure policies.

 

According to Dr To Thi Anh Duong, inflation targeting is a mechanism for monetary policy management, which uses inflation forecast as intermediary targets. The central bank estimates inflationary trends for the next year to make an inflation target (oriented by one indicator or a range of values) without having to bear any responsibility for realising any indicator. Within its powers, the central bank can flexibly select and use its tools to achieve the only target - inflation targeting.

 

The authors also said inflation targeting-driven monetary policy is consistent with the Vietnam Banking System Development Strategy. Accordingly, the State Bank of Vietnam (SBV) will become a modern central bank with the main functions of controlling inflation to stabilise the monetary market, and performing supervision to ensure healthy operation of banking system.

 

According to the research, to apply inflation targeting monetary policies successfully in Vietnam, the central bank needs to meet eight conditions. The first and foremost condition of monetary policies is price stability.

Other conditions are reportedly also very challenging for the central bank, particularly a good forecast for inflation targeting.

 

“However, in Vietnam, CPI (consumer price index) calculation remains limited,” said the authors.

 

The study also cited inflation targeting policy experience applied in countries which shows that most countries apply full-fledged inflation targeting (FFIT) when inflation is successfully controlled and inflation is falling. Hence, policy enforcement has created the public confidence in the central bank’s ability to achieve low and stable inflation.

 

Meanwhile, Vietnam’s inflation has evolved complicatedly since 2004, with inflationary pressures on the rise. Therefore, this is not the time for the central bank to apply full-fledged inflation targeting. But, it can apply an implicit inflation targeting (an unpublicised inflation targeting forecast by the central bank).

 

Mr Nguyen Van Phuc said: Above opinions will be generalised and submitted to the National Assembly deputies, governmental agencies, and National Financial Oversight Committee.