Policymakers in Vietnam have continued with efforts to recalibrate their short-term policy goals by taking more steps to slow credit growth and contain inflationary pressures. Officials' policy agenda for years has reflected a growth-at-all-costs attitude, with the government prioritising a rapid expansion of the economy above price stability. However, with inflation rising to double figures and with many Vietnamese expecting a further round of local-currency devaluation, the country's financial authorities are taking greater steps to revive confidence in both the dong and price stability. The State Bank of Vietnam (SBV, the central bank) began reshaping its policy in February by increasing two policy interest rates, the refinance rate (the lending rate on one of two main lending facilities of the central bank, used on short-term loans) and the reverse repo rate (the rate of interest charged by the SBV during open-market operations) in a bid to slow inflation and keep growth in the outstanding stock of domestic credit this year below 20%, compared with over 37% last year. The SBV has since tightened its monetary policy stance further by increasing the refinance rate by 1 percentage point to 12% on March 8th and to 13% on April 1st, and the discount rate by 5 percentage points to 12% on March 8th.

But the central bank's steady policy tightening might not be enough to stall inflation. In February the authorities devalued the dong by 9% and increased subsidised fuel prices by between 18% and 24%. These moves were followed in March by a rise of 15% in electricity prices, and another round of increases in fuel prices. The impact of these moves has yet to be fully reflected in consumer prices, and the authorities seem to be aware of the depth of the problems that are facing them. On March 18th the CPV's Politburo issued a rare statement following a meeting on the economy. It warned that consumer prices could continue to rise quickly before the government's tightening policies begin to show some impact. This year's target of keeping credit growth below 20% does not appear to be sufficiently stringent. If inflation continues to rise, companies may find it increasingly difficult to service debt in addition to paying higher wages and paying for rising energy and materials prices. Some companies have resorted to borrowing in US dollars because of the lower interest rates on dollar loans, of around 6%, compared with 18% for one-year dong loans. However, such loans could be difficult to repay if the dong is devalued further.

The big question going forward is whether Vietnam will persist with an inflation-targeting policy. Although in theory the SBV has some leeway in terms of adjusting policy to contain inflationary pressures, the reality is that central bank officials are often frustrated by the authorities, who frequently pursue high economic growth rates in order to expand their power bases within the CPV. In July 2010 Vietnam's policymakers loosened policy when inflation appeared to be receding, only for the rate of inflation to accelerate a few months later. This time the Vietnamese government appears to have taken the mistakes of 2010 to heart, and it seems intent on containing inflation owing to its harmful impact on the dong and confidence in the economy. However, it is worth noting that the Politburo statement highlighted that the government was struggling to meet both its goals of rapid economic growth and slower price rises. At some point, Vietnam's political leaders will have to make a difficult choice, and in the past they have always chosen the pro-growth path.