Vietnam's high-inflation episode and the State Bank's tightening cycles

Vietnam's rapid credit-fuelled growth in the mid-2000s, amplified by heavy state-enterprise investment and a surge of foreign direct investment ahead of its 2007 WTO accession, pushed headline inflation to nearly 25% year-on-year by the third quarter of 2008. The State Bank of Vietnam responded by raising its policy rate from 7.5% in April 2008 to 13% by May 2008 and lifting reserve requirements, bringing inflation down over the following year, but the tightening proved short-lived: policy loosened again in 2010 to support growth, and inflation climbed back to 20.2% by the third quarter of 2011. The government's Resolution 11, announced at the end of February 2011, forced a renewed and more sustained round of tightening, with the SBV raising its policy rate from 9% in January 2011 to 15% by November 2011 alongside tighter credit-growth ceilings for banks. That sustained squeeze brought inflation down to around 6.3% by the third quarter of 2012. The episode showed the recurring difficulty the SBV faced balancing Vietnam's growth ambitions against the inflationary consequences of credit-driven expansion.