The Vietnamese central bank's decision to raise a benchmark interest rate last month is helping support the nation's currency, according to the International Monetary Fund.
The State Bank of Vietnam said on Oct. 7 it would raise its refinancing rate to 15 percent from 14 percent, effective Oct. 10. The rate was 9 percent at the beginning of the year.
The dong traded in the free market at about 21,405 per dollar on Nov. 7, having strengthened from around 21,500 on the day prior to the rate announcement, according to Viet Capital Securities figures. The official exchange rate yesterday was 21,010 per dollar. The margin between the official and black- market rate is "small," said Masato Miyazaki, a Washington-based division chief in the IMF's Asia and Pacific department.
"Overall it appears that the refinancing-rate increase has exerted a positive influence on the foreign-exchange market," Miyazaki said in a telephone interview Wednesday during a visit to Hanoi. "One reason why the market rate is holding up relatively well compared with previous years may be that the market believes the authorities are genuinely committed to keeping the current monetary policy stance."
The government passed in February the so-called Resolution 11, which called for a series of measures to slow inflation and stabilize the economy. Consumer prices rose 22 percent from a year earlier in October, the biggest increase among 17 Asian economies tracked by Bloomberg. Pakistan's 11 percent gain was the second largest. Vietnam's inflation rate reached 23 percent in August, the highest since 2008.
Vietnam's government will continue implementing Resolution 11 until "we bring macroeconomic indicators back to normal," Deputy Minister of Planning and Investment Dang Huy Dong said on Oct. 19, citing the goal of cutting inflation "to a single digit, gradually."
While the IMF would have liked to see a "faster decline" in the inflation figure up to now, the agency expects the pace of price gains to slow further in coming months, Miyazaki said.
"I don't think it's critical for them to raise policy rates right now," he said. "It could become necessary if the exchange-rate situation were to deteriorate."
The dong "may come under downward pressure" as foreign- exchange borrowings mature toward the end of the year, the Asian Development Bank said last month. The existence of a 14 percent cap on bank-deposit rates creates a "bias" toward a depreciation of the dong, Miyazaki said. The IMF called last month for the deposit-rate cap to be eliminated.
"Given the existence of the cap, people are likely somewhat discouraged from putting their dong into bank accounts, and in that case, some are likely to want to change their dong into foreign exchange or gold," he said.