Vietnam cuts key interest rates in bid to spur fastest growth

Reuters

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Vietnam's central bank has cut a series of key interest rates in a bid to boost the pace of economic expansion at a time inflation has been low.
The State Bank of Vietnam (SBV) said on Monday it is lowering the refinance rate, at which it lends the Vietnamese dong to banks, to 6.5 percent from 7 percent, and reducing the discount rate to 4.5 percent from 5.0 percent.
The central bank is also cutting the ceiling on interest that banks can offer on dong deposits to 6.0 percent per year from 7.0 percent, which has been the maximum since June.
The new rates take effect on Tuesday.
Monday's monetary policy moves follow similar ones last year to help stabilise the currency and control inflation. Still, most economists say Vietnam has not allowed anywhere near the level of liberalisation and reform that's needed to let the country reach its growth potential.
The ceiling on dollar deposit rates will be cut to 1.0 percent from 1.25 percent. Ceilings on dong loans extended to businesses dealing with agriculture, exports and to small- and medium-sized firms are being lowered to 8 percent from 9 percent.
The SBV indicated that lower inflation levels gave it room for the changes.
"The first quarter's consumer price index could rise 1.5 percent from the end of 2013, much lower than the first quarter of many previous years," Nguyen Thi Hong, director of the central bank's monetary policy department, told reporters.
Lending boost?
In parts of 2011, the annual inflation rate topped 20 percent. In 2013, it was 6.6 percent, the lowest in a decade, and Hong said the pace should again be below 7 percent this year.
SBV Deputy Governor Nguyen Dong Tien said lowering the ceiling on deposit rates would help banks lend at lower rates.
The central bank has projected an annual credit growth of 12-14 percent, after loans rose 12.51 percent in 2013.
Lower interest rates could help Vietnam meet the government's this year's economic growth target of 5.8 percent. The pace in 2013 was 5.4 percent, and the previous year saw 5.25 percent, the slowest growth since 1999.
The fresh rate cuts are "a very rational move from the SBV as the current interest rates are too high while economic growth is in a lower patch compared to last decade," said Le Anh Tuan, chief economist at Ho Chi Minh City-based fund Dragon Capital.
However, Tuan said it would be tough for the rate cuts to lift corporate borrowing demand, as many companies have stopped operations, partly due to a lack of access to credit.
ANZ, in a report on Monday, said the rate reduction will provide "limited support to credit growth" but noted that Vietnam's high levels of non-performing loans (NPLs) continue to be a drag on the economy.
HSBC said on Monday that Vietnam was among several regional economies that should "not just focus on policies that tighten the screws and wheel in growth in the short term".
It said Vietnam needed to restructure its state-run firms and make a level playing field for all investors, while recapitalising the banking system, boosting regulation and supervision and tackling NPLs.
"Returning the banking system to health is critical," HSBC said in a report.

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