Vietnam central bank raises benchmark rate

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Vietnam will raise interest rates for the first time in almost a year after inflation accelerated to a 19-month high last month.

The so-called base rate will be increased to 9 percent Friday, the State Bank of Vietnam said in a statement on its website. The benchmark was last raised to 8 percent from 7 percent on Dec. 1. The refinancing rate will rise to 9 percent from 8 percent, and the discount rate will move to 7 percent from 6 percent.

Vietnam's inflation rate was 9.66 percent in October, holding above 8 percent for the ninth consecutive month and exceeding the government's target for this year. Asianomics Ltd. economist Jim Walker told investors at a Ho Chi Minh City conference last week that Vietnam's government had to "get its act together on interest rates" by boosting lending costs and slowing growth.

"The government needed to address concerns that monetary policy was not dealing decisively enough with high inflation and the pressures on the dong," said Benedict Bingham, the Hanoi- based senior resident representative for the International Monetary Fund in Vietnam. The increase in rates is "a good first step, but further adjustments in policy rates may still be needed," he said.

The dong strengthened to about 20,420 at money changers in Ho Chi Minh City as of 4 p.m. local time, from a record-low of 21,070, according to a telephone directory information service, known as 1080, run by state-owned Vietnam Posts and Telecommunications.

Devaluing currency

The rate changes come after the government said Thursday that it would refrain from changing the exchange rate or dong trading band. The State Bank of Vietnam has devalued the dong three times in the past year, allowing the currency to drop 8.4 percent against the dollar in that time. A weaker currency pushes up the cost of importing goods.

The black-market exchange rate for the dong briefly crossed 21,000 per dollar earlier this week, compared with an official rate of 19,498, before strengthening.

Le Duc Thuy, chairman of Vietnam's National Financial Supervisory Commission, said Thursday that the government doesn't plan to adjust the dong's exchange rate against the dollar before the Tet Lunar New Year holiday in February.

"˜Dangerous strategy'

The UK's Capital Economics warned this week that failing to tighten monetary policy was a "dangerous strategy."

The government, which earlier this year told banks to reduce deposit and lending interest rates to boost economic growth, views low interest rates as "no longer suitable for the current market situation," Thuy said Thursday.

"Economic growth is not our concern now; it will exceed the government target this year," Thuy said, predicting consumer prices will rise by more than the government's target of 8 percent for the whole year. "Curbing inflation is now a challenge."

Vietnam's economy may expand 6.7 percent this year, surpassing the government's previous target of 6.5 percent, Prime Minister Nguyen Tan Dung told the National Assembly on Oct. 20. The government sees an expansion in gross domestic product of 7 percent to 7.5 percent next year and an inflation rate of about 7 percent, he said.

Policy challenge

Large increases in the consumer price index in the final months of the year and volatility in exchange rates at local money changers pose "big difficulties and challenges to the government," according to a report by the National Assembly Committee for Economic Affairs that was cited in a statement on the government's website Thursday.

Vietnam is unlikely to meet its inflation target and the dong will probably be devalued again in the first quarter of 2011, London-based Kevin Grice, an economist at Capital Economics, said in a note this week.

Repeated calls by the government this year for lower commercial lending and deposit rates have undermined market confidence, the IMF said in September. Lenders are now being told to boost dong deposit rates to encourage saving and contain inflation, Thuy said Thursday.

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