Military Bank Securities Company (MBS) has released a report on the dong/US dollar exchange rate, referring to the impact of inflation. The report stated that the inflation of Vietnam and the US has always had a gap in recent years, and most of the time, Vietnam’s inflation was higher than the US’s.
The inflation gap between Vietnam and the US in the previous years ranged from 0.6 percent to 2.9%. Low inflation gap caused the depreciation pressure of dong against the US to decrease significantly from 2014 to early 2020.
However, the inflation pressure of Vietnam has risen from the last months of 2019 to the beginning of 2020. The average Consumer Price Index (CPI) in the first two months of 2020 increased by 5.91 percent over the average level in the same period of 2019. In particular, the CPI in February rose up by 1.06 percent over December 2019, and by 5.4 percent over the same period of last year. The growth rate of both CPIs continued to be the highest in seven years.
According to MBS, the inflation gap between the US and Vietnam has increased to fairly high level of 3.1 percent (2.3 percent compared to 5.4%). This level is creating stronger expectation of a dong devaluation than normal, creating the pressure to increase the dong/US dollar exchange rate.
In March and April, Vietnam’s inflation is expected to cool down when many commodity groups reduce prices including petrol (down due to lower world prices), foods (due to the recovery of pork supply), families’ outdoor entertainment services (due to low demand). Thus, the inflation gap between Vietnam and the US is forecasted to be narrowed down, thereby putting less pressure on the dong.
Although the issue of inflation still present, MBS assessed that Vietnam’s inflation will likely drop to below 3.5 percent in 2020. The inflation gap between Vietnam and the US by 2020 is expected to fluctuate around two percent. Based on the purchasing power parity theory, the dong will only depreciate by about two percent compared to the beginning of the year.
