Banks will loosen monetary policy because of corona Virus?

The Corona flu is having an impact on almost every aspect of the Vietnamese economy . MBS Securities Company 's recent outlook for Vietnam at the end

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The Corona flu is having an impact on almost every aspect of the Vietnamese economy . MBS Securities Company ‘s recent outlook for Vietnam at the end of January 2020 said that inflation would decline in the second quarter, partly due to the influenza epidemic. Accordingly, the consequence of weaker economic activity in the second half of the first quarter due to the disease may be the motivation for looser monetary policy from the SBV.

Specifically, in January, inflation continued to rise sharply due to the impact of pork prices and consumer demand during that. The consumer price index in January increased by 6.4% over the same period in 2019, up from 5.2% in December according to data released by the General Statistics Office of Vietnam.

Inflation in January continued to rise sharply because pork prices were still maintained at the peak. Limited supply due to African swine cholera while high demand for that holiday caused pork price to rise by 8.3% MoM, making the foodstuff index up by 2.6% MoM.

However, the increasing pressure of pork price on inflation will decline from the end of Q1 due to: 1) Demand for pork usually tends to decrease sharply next month that, 2) The supply of pork will increase when The government allows the import of 100,000 tons of pork in Q1 / 2020. 3) Domestic pork production will increase as large businesses and households increase their herds in the near future. The price of live hog in early February is now at 80,000-82,000 / kg, down 10,000 VND compared to December.

The sharp drop in oil prices due to corona flu is a factor that will reduce inflationary pressures in coming months. The outbreak of corona virus makes the picture of China’s economic growth prospects in Q1 and Q2 more gloomy, forecast to reduce China’s economic growth from 0.5-1.5%, disrupting the already weakened manufacturing industry due to trade wars. Oil and commodity prices plummeted as the demand for input in China continued to weaken. Brent oil price has dropped 15% since the beginning of the year so far from 66 USD / barrel, currently at 56.3 USD / barrel (February 6).

“We think inflationary pressures will decline in February when consumer demand tends to decline after that,” the analyst said. At the same time, the impact of the corona epidemic makes the necessity of consumption less restrictive, the price of pork cools down when the kitchens of students and students take 2 more weeks off and demand in the traditional markets weakens due to the epidemic. Influenza, oil and commodity prices plummeted will be the factors to reduce inflationary pressures next month.

In the opposite direction, however, the disease that could lead to a decline in agricultural production will support food prices in the face of falling domestic and international demand. Interruption of harvest and transportation, along with the closure of borders and blockade, isolating infected areas will increase the cost of bringing food to consumers (transportation costs, cargo insurance). chemistry). Increasing stockpiles of staple foods can lead to scarcity of food and increase in the food price index. In addition, the increase in prices of medical equipment when the demand for drugs and medical equipment to prevent the spread of disease also contributes to inflationary pressures.

While the corona flu has had a deflationary effect on much of the price of goods and services due to declining consumer demand, the consequence of weaker economic activity in the second half of the first quarter due to the disease could be dynamic. The impetus for loosening monetary policy is the State Bank of Vietnam (SBV), partly balancing the impact on inflation of corona virus.

However, due to high inflation at the end of 2019 and January 2020, the SBV will be limited in its ability to continue to loosen monetary policy to support the economy, MBS said that in general, pressure The inflation in the coming time will be reduced due to the weakening of economic activity in the first quarter and the first half of the second quarter.

Besides inflation, the exchange rate has also increased by more than VND 100 to around VND 23,300 / USD recently because the corona flu caused the USD to temporarily strengthen when investors sought safe haven channels. DXY’s index has increased by 1.5% from the beginning of the year to nearly 98 points. At the same time, the move to support the market of the Central Bank of China by injecting a net of 600 billion yuan (86 billion US dollars) on February 3 and 4, lowering repo and lending rates by 10 basis points at risk. The coronary disease destabilizes the financial system and economy, which is facing many difficulties of this country. The loosening policy of the PBOC, the current account deficit and the declining growth outlook will contribute to the weakening of the renminbi by 7 yuan to 1 USD.

With the impact on the currencies of Vietnam’s two largest trading partners and inflationary pressure increasing since the end of Q4 / 2019, short-term pressure on VND is higher. However, according to MBS, with a healthy economy, a large current account balance and an influx of investment flows into Vietnam, the VND / USD exchange rate in 2020 will continue to remain variable. Low movement in the range of 1-2%.