Vietnam to lift key interest rate

October 7, 2011


Vietnam to lift key interest rate


Vietnam will raise a key policy interest rate for the fifth time this year, the central bank announced, as it tries to contain Asia's highest inflation rate and renewed pressure on its dong currency.


The refinancing rate, one of several monetary policy tools used by the communist state to steer its economy, will increase to 15 percent from 14 percent next week, the State Bank of Vietnam said late Thursday.


Since mid-February, the rate has been gradually lifted from nine percent, although the bank had not moved since its fourth hike on May 1.


Higher refinancing rates increase the cost for commercial banks that borrow from the central bank to supplement their own capital.


Economist Le Dang Doanh said the move will help the government battle inflation, which hit 22 percent in September year-on-year, while forcing the country's small banks to be more prudent in their lending.


"It's an obvious reaction to assist the weak banks which make up about 14 percent of the banking sector and could be in danger of failing," Doanh said.


Analysts have also expressed concern that the amount of bad loans held by Vietnamese banks may be higher than officially reported, and that struggling smaller financial institutions should be consolidated.


Economists say the dong is under renewed pressure as outstanding US dollar loans come due towards the end of the year. Borrowers in dollars had been taking advantage of much higher interest rates available if they invested in dong, the economists say.


The dong has been relatively stable since a 9.3 percent devaluation in February, and was quoted on Friday at an official rate of 20,653 against the dollar after weakening slightly in recent days.


The State Bank said its interest rate adjustment aimed "to improve the efficiency of the management of the monetary policy and market interest rate co-ordination."


Economists say tighter monetary policy helps reduce inflation but Doanh urged the government to also exercise greater control of its spending.


Vietnam's growth eased slightly to 5.76 percent year-on-year in the first nine months of 2011, compared with 6.54 percent in the same period of 2010, according to an official estimate.


Authorities have maintained a growth target of around six percent for 2011 and are aiming for 18 percent inflation. (AFP)



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