Vietnam central bank cuts a benchmark rate to 14 pct

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Vietnam's central bank has cut the interest rate it charges for loans in open market operations (OMO) by 100 basis points to 14 percent, its daily OMO report showed on Monday, after the monthly inflation rate last month eased slightly from May.

The State Bank of Vietnam had raised the reverse repurchase rate in its daily open market operations by 100 basis points to 15 percent on May 17.

The move surprised some economists.

"If they ease too early, it will trigger inflationary pressures in Q1 next year, so the CPI would not fall as much as it may have," said Francois Chavasseau, a fixed income analyst at Sacombank Securities.

"The move could also mean that the Vietnamese government still cares about growth finally," he said, adding his firm had expected a reduction to take place later this year.

The authorities have recently stressed the fight against inflation rather than efforts to stoke economic growth.

Last Thursday the government said it would strive to contain inflation this year to 15-17 percent, raising its target for the second time in June from the 15 percent set on June 3.

The annual inflation rate topped 20 percent in June, the highest since November 2008, but the monthly consumer price rise dropped to 1.09 percent compared with May, after 2.21 percent between April and May.

The government has also cut its GDP growth forecast to 6 percent from 6.5 percent.

The International Monetary Fund said in June that interest rates ought to be increased, warning at an aid donors' meeting that confidence in the government's policies was fragile.

However, some economists said Monday's move might simply reflect liquidity flows.

"The OMO rate reduction means liquidity is better," said economist Vo Tri Thanh at the Central Institute for Economic Management, a government think-tank.

Vietnamese banks faced a liquidity squeeze for both dong and dollars when dong deposits fell this year.

"Overall, the national target is to tighten monetary policy but the management also depends on the time and day-to-day issues," Thanh said.

Other key rates were left unchanged, including the refinance rate and the discount rate, which were increased 100 basis points at the end of April to 14 percent and 13 percent respectively.

ANZ said it expected the central bank to raise its refinancing rate to 16 percent as early as September from 14 percent now.

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