Vietnam raises rates for second time in a week to battle inflation

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Vietnam's central bank raised its reverse repurchase rate, the second increase in borrowing costs in less than a week, as Prime Minister Nguyen Tan Dung prepares to order tighter policies to tame inflation.

The State Bank of Vietnam raised the rate it charges commercial banks in daily open-market operations to 12 percent from 11 percent for the seven-day term on Tuesday, Deputy Governor Nguyen Toan Thang said by telephone in Hanoi. Dung will sign a resolution on Wednesday directing the central bank and ministries to curb inflation by tightening monetary and fiscal policy, Le Xuan Nghia, an adviser to the premier, said Tuesday.

Vietnam is under pressure to curb inflation that is poised to accelerate from a 23-month high as electricity prices rise and four currency devaluations in 15 months spur import costs. The nation raised its refinancing rate by 2 percentage points to 11 percent last week, joining neighbors from Thailand to China in tightening policy.

"This step to tighten monetary policy is a move in the right direction," Benedict Bingham, the International Monetary Fund's senior resident representative in Vietnam, said after the rate increase Tuesday. "It's probably a more significant move than the refinance rate adjustment."

As the country reduces its reliance on the base rate as a benchmark for monetary policy, Vietnam will probably focus instead "on one of the other policy rates, most likely the repo rate, or perhaps the refinance rate," he said earlier this week.

Stock moves

Vietnam's VN Index has fallen 3 percent this year amid concern accelerating inflation will prompt the central bank to raise interest rates. The benchmark stock measure fluctuated, rising as much as 0.9 percent and declining as much as 0.7 percent before trading little changed at 10:35 a.m. local time. The rate increase was announced after Tuesday's market close.

Stocks dropped on Tuesday, with the benchmark index completing the biggest two-day decline in 15 months.

"Whatever the government is going to do now, it'll aim to tighten monetary policy to fight inflation," Nguyen Duc Hai, chief analyst at Hanoi-based Vietcombank Securities, said by phone Wednesday. "Tightening monetary policy will hurt the stock market as it will make it more difficult, more expensive for investors to get funds. It will also add cost for companies' production and so may lessen corporate earnings."

Credit growth

Prime Minister Dung will approve lowering the target for credit growth this year to about 20 percent from 23 percent in the resolution, Nghia said by phone Tuesday. There will be a series of instructions and ministries and the central bank are expected to come up with detailed measures to carry out the directive, said Nghia, who is vice-chairman of the National Financial Supervisory Commission.

The government will focus on the "main task" of curbing inflation in 2011, according to a statement on its website late Tuesday that cited Dung. Authorities consulted with economists on the resolution and also plan to come up with a "comprehensive" initiative in the first quarter, according to the statement.

The resolution would direct the central bank to implement a "tight and cautious" monetary policy, and combine monetary and fiscal policy to ensure credit growth of less than 20 percent this year, according to the statement. The State Bank of Vietnam will have to manage interest and foreign-exchange rates at "suitable levels" to control inflation, and the government will ensure adequate foreign currency to meet demand, it said.

Budget deficit

Dung will ask relevant ministries to tighten fiscal policy, cut 10 percent of public expenses and narrow the budget deficit to less than 5 percent of gross domestic product, according to the statement. He will also call on businesses to speed up production to control the trade deficit. Vietnam will adjust petroleum and electricity prices based on market conditions, the statement showed.

"If inflationary pressures are not curbed soon, they will eventually filter into wages and into the prices of manufacturing goods, affecting the overall competitiveness of Vietnamese exports," Deepak Mishra, the World Bank's lead economist in Vietnam, said in a Feb. 21 telephone interview in Hanoi. "We remain worried that overall inflation is high."

The nation's inflation rate reached 12.17 percent last month, the highest level since February 2009. The government's target to keep inflation at or below 7 percent this year will be difficult to meet, Thoi Bao Kinh Te Vietnam newspaper reported Tuesday, citing Nguyen Tien Thoa, the head of price control at the Ministry of Finance.

Power costs

Electricity prices will rise by an average 15.3 percent, starting March 1, Hoang Quoc Vuong, deputy minister of trade and industry, said Feb. 21.

The reverse repurchase rate had been held at 11 percent since Jan. 10, after the State Bank of Vietnam raised it six times from 7 percent since November.

"The move is necessary after we increased the refinancing rate and overnight rate," said Thang, a deputy governor at the central bank.

The increase will help the central bank withdraw more money from the financial system, reducing loanable funds and easing inflation pressure, Hai Pham, an analyst with Australia & New Zealand Banking Group in Singapore, said in a note Tuesday.

The market has tumbled "thanks to a toxic mix of currency devaluation, high inflation and perceived inaction from the government," Michel Tosto, director for institutional sales and brokerage at Ho Chi Minh City-based Viet Capital Securities, wrote in an e-mail Feb. 21.

Trade deficit

The country posted a trade deficit of $12.4 billion in 2010. The State Bank of Vietnam devalued the nation's currency by about 7 percent on Feb. 11, the most since at least 1993, to curb the nation's trade gap and narrow the difference between official and black-market exchange rates.

The IMF has urged Vietnam to "focus more decisively" on containing price gains and Moody's and Standard & Poor's cut the Southeast Asian country's sovereign credit ratings in December.

Nghia said the outlines of the prime minister's instructions were first discussed in meetings in December, which were in response to international investors' concerns about macroeconomic stability.

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