Vietnam raises a key rate to support dong, fight inflation

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Vietnam's central bank increased its refinancing rate for the first time since May, as the nation tries to steady its currency and tame Asia's fastest inflation.

The State Bank of Vietnam raised the refinancing rate to 15 percent from 14 percent, effective Oct. 10, it said in a statement on its website Thursday. The central bank weakened the dong's reference exchange rate for the third straight day on Friday, to 20,653 per dollar from 20,648 per dollar.

Vietnam has struggled to regain investor confidence hurt by inflation of more than 20 percent, a trade deficit and risks in the banking sector. While the rate increase is welcome, the central bank should further tighten monetary conditions if necessary to reassure the market that economic stability remains its top priority, the International Monetary Fund said.

"Vietnam had to raise rates, but a rate hike won't change the weaker dong trend," said Shigehisa Shiroki, chief trader on the Asian and emerging-markets team at Mizuho Corporate Bank Ltd. in Tokyo. "The country has a trade deficit and like many other Asian nations now, money is not flowing into Vietnam either due to risk aversion. The dong will continue to see downward pressure."

The currency was little changed at 20,843 per dollar as of 12:00 p.m. on Friday in Hanoi, according to data compiled by Bloomberg. The weakening of the reference exchange rate on Oct. 5 was the first change since Aug. 24. The dong was devalued for the fourth time in 15 months on Feb. 11, by about 7 percent, partly to help curb the trade gap. The VN Index of stocks fell 0.8 percent.

No "˜huge effect'

The rate increase is "unlikely to have a huge effect on lowering inflation," Masato Miyazaki, the IMF's Washington-based mission chief for Vietnam, said in an e-mailed statement received Friday. The central bank should abolish the cap on deposit rates for dong to "help normalize the monetary transmission mechanism," Miyazaki said.

Asian currencies from the Philippine peso to South Korea's won have tumbled against the dollar over the past month, as concern the world economy faces a slump prompts investors to pare bets on emerging markets.

Confidence in the dong is "shaky," according to Viet Capital Securities, which on Thursday said the currency was trading at 21,500 per dollar on the black market. The trade deficit widened to $1 billion in September from a revised $396 million in August.

Policy efficiency

Vietnam's move is the first change to a key interest rate under new central bank Governor Nguyen Van Binh and contrasts with neighbors such as Malaysia and China, which left borrowing costs unchanged in recent weeks to shield their economies.

The increase in the refinancing rate is aimed at improving "the efficiency of monetary policy" and regulating "market interest rates," the central bank said in Thursday's statement. It left its repurchase rate at 14 percent and its discount rate at 13 percent.

The State Bank of Vietnam increased the repurchase, refinancing and discount rates earlier this year in an attempt to stem credit growth, slow price gains and stabilize the economy. It raised the repurchase rate in nine steps from 7 percent at the start of November last year to 15 percent in May 2011, before cutting it in July to 14 percent.

The government said in August the central bank will consider lowering rates if inflation slows.

The latest refinancing rate increase is "an encouraging sign, but we'll have to see whether it continues," said Thomas Harr, head of Asian foreign-exchange strategy at Standard Chartered Plc in Singapore. "Because interest rates in Vietnam are too low, you have a lot of money shifting into gold."

Gold-backed loans

The State Bank of Vietnam asked commercial banks to provide details of gold-backed loans issued since the start of the year until Oct. 7, according to a separate statement dated Thursday and posted on its website Friday.

Commercial banks will also be obliged to file weekly reports on gold-backed lending to the central bank, with the first reports due Oct. 12, it said. The reporting will help the central bank monitor and stabilize the gold and foreign-exchange markets, it said.

The July rate reduction and a government push in August for lower commercial borrowing costs "have created uncertainties about the monetary policy strategy," Trinh Nguyen, a Hong Kong- based economist at HSBC Holdings Plc, wrote in a note released Thursday before the rate increase was announced.

Consumer prices climbed 22.42 percent in September from a year earlier, compared with 23.02 percent in August. Vietnam's inflation rate remains the fastest in a basket of 17 Asian- Pacific economies tracked by Bloomberg.

The central bank on Thursday also raised overnight interest rates on electronic transactions to 16 percent from 14 percent, effective Oct. 10.

Domestic economic imbalances pose a risk to Vietnamese banks' asset quality, Moody's Investors Service said last month.

Vietnam's gross domestic product may rise 5.8 percent in 2011, the slowest pace since 2009, Asian Development Bank data show. The economy, a production hub for companies from Intel Corp. (INTC) to Honda Motor Co., expanded 6.8 percent in 2010.

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