Vietnam cuts interest rates to aid growth after inflation slowed

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Dollar and dong notes seen at a bank in Ho Chi Minh City. Experts say the dong will remain stable through the end of the year.

Vietnam's central bank cut interest rates as inflation slowed, seeking to spur lending and boost consumption after a credit crunch slowed economic growth to a 13-year low.

The State Bank of Vietnam lowered the refinance rate to 8 percent from 9 percent and the discount rate to 6 percent from 7 percent, according to a statement on its website. It also reduced the cap on dong deposit interest rates to 7.5 percent from 8 percent. The new rates are effective March 26.

Vietnam last lowered borrowing costs in December, even as the World Bank said the nation faces the risk of premature easing that may trigger a resurgence in inflation. The economy grew 5.03 percent last year after rising levels of bad debt curbed bank lending and expansion, while consumer prices rose 6.64 percent in March, the slowest pace since September.

"The rate cuts show the regulator seems pretty confident that inflation will be at a low level this year," said Hoang Thach Lan, head of the brokerage unit at Ho Chi Minh City-based MHB Securities Co. "These cuts will help banks to lower funding costs and can help them offer cheaper loans. However, prices may rise after these moves since more money will flow into the economy, so we need to be mindful on inflation."

The Ho Chi Minh City Stock Exchange's VN Index closed 0.7 percent higher after the announcement. The dong was little changed at 20,945 against the dollar.

Low demand

The central bank also lowered the interest rate cap on short-term dong loans for sectors including agriculture, exports, small and medium-sized enterprises to 11 percent from 12 percent. The monetary authority said in January it is targeting credit growth of 12 percent this year, up from about 9 percent in 2012.

"Inflation is at a low level," the central bank said in the statement. "Banks' funds have improved, with stable money markets and increased foreign reserves. However, businesses still face many difficulties due to low market demand, and companies' abilities to absorb banks' loans is still limited."

Prime Minister Nguyen Tan Dung in February approved a master plan to revamp the economy, and has appointed Deputy Prime Minister Vu Van Ninh and central bank Governor Nguyen Van Binh to oversee a panel to restructure banks by 2015. An asset management company will be set up by the end of this month to resolve bad debt, according to Le Xuan Nghia, a member of the National Financial and Monetary Policy Advisory Council.

Vietnam posted an annual trade surplus last year for the first time in two decades. The World Bank forecasts the country's GDP will increase 5.5 percent this year.

Vietnam's central bank lowered interest rates six times last year, with the last reductions taking effect Dec. 24. So far this year, the nation joins India in cutting borrowing costs.

"The economy is still struggling," said Matt Hildebrandt, a Singapore-based economist at JPMorgan Chase & Co. "In real terms, policy rates are still high and inflation appears to be contained," so there was room to cut, he said, adding that he expects rates to be lowered by another 100 basis points in 2013.

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