Interest rates set to rise after central bank's surprise move

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Interest rates are forecast to rise further after the government, in an unexpected move, raised three key rates on Friday.

A government decision to stop asking lenders to cut their rates may also add to the likelihood of interest rate hikes.

The State Bank of Vietnam increased its key rates by 1 percentage point each, bringing the base rate and the refinance rate to 9 percent and the discount rate to 7 percent.

Nguyen Ngoc Bao, head of the central bank's Monetary Policy Department, said the key rates hikes were a measure to tighten monetary control and curb inflation.

The hikes came after credit growth reached 22.5 percent in the ten months ending October, which means the full-year target of 25 percent can be exceeded.

After the hikes, interest rates on the market will increase slightly, Bao said.

Last week, Le Duc Thuy, chairman of the National Financial Supervisory Commission, announced that the government had decided to halt a plan to lower interest rates at commercial banks.

Banks are now allowed to freely set interest rates on dong loans and deposits based on market supply and demand.

The government had earlier targeted lowering deposit rates to 10 percent and cut borrowing costs to 12 percent to spur economic growth.

Thuy said he expected deposit rates to rise to 13 percent and lending rates to between 15 and 17 percent.

Several bankers told Thanh Nien that with higher central refinance and discount rates, local banks would have no choice but to raise their rates.

While the central bank has allowed interest rates to float freely, 16 members of the Vietnam Bank Association on Friday agreed to keep deposit rates at a maximum of 12 percent a year.

Previously, the Banks Association set a 11 percent cap on deposit rates. The consensus had raised concerns that local banks have violated Vietnam's Competition Law.

On the dollar front, the Vietnam Association of Financial Investors has recently proposed that the government imposes a cap on dollar deposit interest rates.

It said rates of around 5 percent now are too high and need to be cut down to no higher than 1 percent in order to stop dollar speculation and dollarization in the economy.

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