Vietnam central bank cuts policy rates for fourth straight month

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Vietnam's central bank cut interest rates for the fourth straight month to spur an economy that may expand at the slowest pace in more than a decade, joining policy makers from Brazil to China in countering a global slump.

The central bank's refinancing rate was cut to 11 percent from 12 percent, while the discount rate was lowered to 9 percent from 10 percent, the State Bank of Vietnam said in an e- mailed statement. The reductions are effective June 11, it said.

Monetary-policy makers from around the world are being pressed into action to shore up a global economy that is suffering its steepest slowdown since the recession ended in 2009.

Vietnam's gross domestic product rose 4 percent in the first quarter, and growth this year may be as low as 5.2 percent, central bank Governor Nguyen Van Binh said this week, which would be the slowest pace since a 4.8 percent rate in 1999.

Maintaining macroeconomic stability is a government priority, and "the negative impacts of controlling inflation, especially on enterprises and employment need to be addressed," Deputy Prime Minister Hoang Trung Hai said in a meeting with lending agencies and donor nations this week in the central town of Dong Ha, according to a release from the World Bank.

A slowdown in the economy is hurting companies amid a credit crunch after the central bank raised borrowing costs last year to fight inflation, which was then the fastest in Asia.

Commercial bank lending fell 0.66 percent through April from the end of 2011, Dau Tu newspaper reported last month.

Easing Inflation

"If you take a situation where credit growth has been negative, they have to ask some questions," Victoria Kwakwa, the World Bank's Vietnam country director, said before the decision. "It makes sense for them to be concerned about it and to say, did we go too far?"

The State Bank of Vietnam will cut the dong deposit rate cap by two percentage points to 9 percent from June 11, Binh said this week. The reduction is in line with easing inflation and will support companies, Binh told the National Assembly.

Vietnam's inflation rate slowed to 8.34 percent in May from 23.02 percent in August 2011, the lowest in 21 months. The pace of price gains may be 7 to 8 percent at year-end, Binh said.
Falling crude prices led Vietnam to cut fuel costs for the third time in a month this week, lowering gasoline by 3.5 percent. Diesel, fuel oil and kerosene prices were also reduced.

Even so, inflation is likely to reverse its slowing trend in the second half, due to moves to liberalize prices of inputs including coal, higher wages for civil servants, and an easing monetary policy, the World Bank said in a report on June 4.

Downward pressure

China on Thursday unveiled its first reduction in borrowing costs since 2008 to counter what Premier Wen Jiabao has called increasing downward economic pressure. Brazil and India have also cut borrowing costs in recent months.

Still, Vietnam should prioritize containing inflation and be cautious about lowering interest rates further, the International Monetary Fund said on June 4.

The country has a history of prematurely loosening policy and the government should be careful not to shift to an expansionary stance too soon, the World Bank said the same day.

"As the government eases its policy stance, it risks renewing concerns about its commitment to price stability," Standard & Poor's said on June 6, as the credit-ratings company raised its outlook on Vietnam's long-term sovereign credit to stable from negative.

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