Vietnam holds interest rates despite inflation

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Vietnam's central bank said on Thursday it was holding its benchmark base rate at 8 percent in April, the fifth consecutive month at that level.

On Wednesday, the government said the consumer price index rose an annual 9.46 percent in March, the highest inflation rate in a year. Some economists had expected rates to be increased to control inflationary pressures.

"The governor of the State Bank of Vietnam just signed a decision holding the dong base rate at 8 percent per year in comparison to the previous month," a brief statement on the central bank's website (www.sbv.gov.vn) said.

The decision would take effect April 1, and the announcement said it represented the fifth consecutive month rates "have been kept stable".

The statement gave no explanation for the decision nor did it mention other rates.

Vietnam last increased the policy rate to 8 percent from 7 percent at the start of December after keeping it unchanged since February 2009.

That may have been less about inflation than gaining control over the beleaguered dong. The late November announcement was accompanied by a devaluation.

The authorities may have opted against a rate increase this month because monetary policy was effectively tightened at the beginning of March by a decision to lift the lending rate cap on medium- and long-term loans. Some lending rates have since leapt as high as 20 percent, according to the State Bank of Vietnam.

Short-term loan rates remain officially restricted to 1.5 times the base rate, or 12 percent.

The government has also cut back some of the stimulus measures it enacted during the global slowdown and set lower targets for money supply growth and credit growth this year.

Following the March inflation data, HSBC's Wellian Wiranto wrote in a report that consumer prices were "worryingly high," and he expected a 100 basis point increase in the base rate in coming weeks.

"In some ways, hiking the policy rate now would be merely formalizing the pseudo-tightening that has taken place anyway -- with the crucial benefit of signaling the authorities' seriousness in fighting inflation to consumers and the market," he said.

"In the fight against inflation, raising interest rates remains the most market-familiar way of doing things."

London-based Capital Economics, too, has forecast a rise in the base rate to 9 percent.

"Admittedly, bank lending rates have already moved up, which has effectively tightened monetary policy," it said in a March 22 report.

"But the base rate is now negative in real terms and consumer price gains are likely to accelerate further in coming months. We continue to forecast that the base rate will peak out at 12.0 percent at some point in 2010."

Prakriti Sofat at Barclays Capital did not speculate about a policy response to March's CPI, but said in a report on Thursday inflation would rise in coming months in the wake of a currency devaluation in February, increases in food and energy prices and high construction costs.

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