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Vietnam central bank to keep benchmark rate at 8 pct next month   2009-12-28 - Bloomberg

Vietnam’s central bank will keep the benchmark interest rate at a one-year high of 8 percent in January to help strengthen the economy.


The central bank unexpectedly increased the base rate to 8 percent last month amid signs of quickening inflation, after holding it at 7 percent for 10 months to revive the economy. The government also subsidized corporate borrowing and reduced tax payments to boost gross domestic product.

“The central bank may want to keep rates unchanged because it doesn’t want to add to costs for companies, especially because the loan subsidy program has been pared back,” said Duong Thu Huong, Hanoi-based general secretary of the Vietnam Banks Association and a former deputy governor of the central bank.

The government is trying to find a balance between boosting economic growth and easing inflation, Prime Minister Nguyen Tan Dung told bankers at a conference Dec. 23.

Policy makers will also keep the refinancing rate at 8 percent and maintain the discount rate at 6 percent, according to a separate statement on the bank’s Web site today.

Average inflation has been below the government’s target of 7 percent this year, according to an announcement on its Web site yesterday. The consumer price index rose 6.5 percent in December, the fastest pace since April, the General Statistics Office said yesterday.

‘Acceptable pace’

“Inflation is quickening, but still at an acceptable pace, so we don’t need to raise the base rate right now,” Le Xuan Nghia, Hanoi-based vice chairman of the National Financial Supervision Commission, and former head of the central bank’s department for banking strategy, said by telephone today. “It’s also better for businesses.”

The economy expanded 3.1 percent in the first quarter, the slowest pace on record, before growth quickened to 4.5 percent in the second quarter and 5.8 percent in the next three months. The Hanoi-based General Statistics Office will probably release December GDP figures next week.

Annual inflation may accelerate to 14.2 percent by the third quarter, Nomura Holdings Inc. predicted in a report released last week.

“Dangers are coming from the increases in inflation,” Ayumi Konishi, Asian Development Bank country director for Vietnam, said on Dec. 22. The ADB recommends Vietnam “really start looking carefully at the possibility and the need and time to tighten their monetary policy further.”

Currency ‘vulnerabilities’

In addition to raising rates last month, the central bank also allowed the dong to depreciate 5 percent by setting a lower reference rate for the currency. A widening trade deficit had fueled concerns the currency will weaken as demand for dollars and gold increased.

Higher interest rates are needed because of “increased vulnerabilities, partly coming from the foreign-exchange situation,” the ADB’s Konishi said.

Vietnam aims to limit inflation to 7 percent next year, and for GDP to expand 6.5 percent, the government said in a report released on Dec. 3 at a meeting in Hanoi with international organizations.

The country will “transfer from a loose monetary policy to a cautious, flexible policy,” the report said.

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