Vietnam cut its interest rates to support a slowing economy, a move the International Monetary Fund said can be justified by the nation's easing inflation.
The State Bank of Vietnam will reduce the repurchase rate by 1 percentage point to 13 percent, and lower the refinancing rate for the first time since 2009 by the same amount to 14 percent, effective on Tuesday, it said Monday. Slowing price gains may allow the central bank to cut rates by 100 basis points each quarter, Governor Nguyen Van Binh told reporters in Hanoi.
Vietnam joins emerging markets from Thailand to Brazil in lowering borrowing costs as Europe's sovereign-debt crisis and rising oil prices threaten expansion. The government can make a case for a rate-cut now, the IMF's mission chief for the nation said, as it has been implementing "fairly well' its so-called Resolution 11 policy passed a year ago, that was aimed at reining in its inflation rate.
"I can see the justification for doing it," Washington-based Masato Miyazaki said in a telephone interview Monday during a visit to Hanoi. "The inflation rate has been consistently coming down and we expect that trajectory to continue," he said, adding that signs of weak economic activity in the first two months also add to the case.
Vietnam's price gains eased for a sixth straight month in February, and were at 16.44 percent compared with 17.27 percent in January. The central bank forecasts the inflation may decelerate to below 10 percent by the end of the year, which would slow economic growth to 5.5 percent this year, Binh said. The economy expanded 5.89 percent last year, down from 6.78 percent in 2010.
The central bank also cut the discount rate to 12 percent from 13 percent and the dong deposit cap for terms of one month and above to 13 percent from 14 percent. The dong deposit rate cap may be removed in one or two quarters, Binh said. The central bank announced its intention to cut rates on March 6.
"The rate cut aims to support growth, as inflation pressures have eased and liquidity in the banking system has improved," Hai Pham, a Singapore-based analyst at Australia & New Zealand Banking Group Ltd., said before the decision. "The central bank is confident about the inflation trajectory."
South Korea, Indonesia and Malaysia held rates last week, while Brazil cut borrowing costs more than expected. India unexpectedly slashed the amount of deposits lenders need to set aside as reserves before a policy meeting this week.
Fastest in Asia
"Timing-wise we would have preferred it to be a bit later but we wouldn't have advocated for indefinite maintenance of tight conditions," said Miyazaki. "If they keep their word on maintaining macroeconomic stability, I think and hope that the next rate cut would only take place when there is 100 percent certainty that the inflation repercussions would be minimum."
Vietnam's inflation is still the fastest in a basket of 17 Asia-Pacific economies tracked by Bloomberg, and the nation is also juggling a trade deficit and liquidity concerns in its banking system.
The World Bank and the International Monetary Fund said in December the nation may undermine progress toward economic stability if it loosens monetary policy too soon.
"The credibility of the State Bank of Vietnam is much improved compared with a year ago," Miyazaki said Monday. "Given that this rate cut was expected, that it was only one percentage point, and given the slowdown in inflation and the stability in the foreign exchange market, I don't think this will heavily dent their credibility."