Vietnam needs "true' monetary tool, Standard Chartered says

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Vietnam should focus on finding more effective monetary policy tools rather than change its benchmark interest rate, Standard Chartered Plc said.

The central bank's so-called base rate has been kept at 8 percent since December, when it was raised from 7 percent, and the State Bank of Vietnam said May 31 that it would keep the rate unchanged this month.

"In terms of interest rates, we don't expect them to make any significant moves," Nicholas Kwan, the Hong Kong-based regional head of research at Standard Chartered, told reporters Monday at a World Economic Forum conference in Ho Chi Minh City. "The more immediate task for the central bank is to find true monetary tools, rather than to move the rate level."

Standard Chartered joins Australia & New Zealand Banking Group Ltd. in saying Vietnam needs a new monetary policy instrument to control credit growth and inflation. The severing this year of a link between the benchmark and market lending rates has made "the base rate much less relevant," and the central bank may soon switch to a more "market-oriented" benchmark, Standard Chartered said in a report last month.

Vietnam's inflation rate is still high, while the country's trade deficit is "sizeable," with the pace of growth in imports through May more than twice that of exports, Kwan said.

Consumer prices rose 9.05 percent in May from a year earlier, staying above 9 percent for a third month. The trade deficit in the first five months of 2010 was $5.38 billion, more than four times the shortfall in the same period a year earlier.

No "˜aggressive easing'

"All these are concerns behind the mind of the central bank, which will hold back from any aggressive easing," Kwan said. Vietnam is still building its monetary policy regime, and needs tools to make its policies work more effectively, he said.

Low market interest rates would be a "modest negative" for the Vietnamese dong, Standard Chartered said in its report last month.

The currency may trade in a range of VND19,000 to 20,000 per dollar over the next two years, Kwan said.

"There is still a risk that things could go weaker rather than stronger," he said. "But if you look at the balance-of- payments situation and the debt-financing situation, it will probably be reasonably stable."

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