Vietnam rate hike to help cut inflation: economist

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Economists on Friday welcomed a larger than expected rise in a key Vietnamese interest rate as part of efforts to curb rising prices, but said that more needs to be done to boost the economy.

The State Bank of Vietnam announced on Thursday that its refinancing rate would rise from nine to 11 percent, but left two other measures, the base and discount rates, unchanged at nine and seven percent respectively.

It followed a currency devaluation last week -- the fourth in 15 months -- as the government struggles to address a complicated mix of problems including a huge trade deficit and high inflation.

Analysis from Capital Economics consultancy suggested the move, which was larger than predicted, would dampen domestic demand and "help to stop the economy from overheating".

"It appears that policymakers are finally getting serious about addressing the challenges facing the economy. Another necessary step will be to reduce the budget deficit and curb the rise in government debt," the statement said.

The ruling Communist Party's five-yearly congress last month set an economic framework for the coming years, with leaders noting a need to "stabilize the macroeconomy".

Vietnam has recorded impressive growth but economic expansion has come with increased risks, including higher inflation and currency pressure.

Inflation has increased every month since August 2010, hitting 12.17 percent year-on-year in January, far higher than regional neighbors.

Capital Economics said the rate rise, by reducing inflationary pressure, will act as a counterweight to the devaluation of the Vietnamese dong, which was expected to contribute to rising prices by pushing up the cost of imported oil.

Vishnu Varathan, a Singapore-based economist with the firm, said authorities had sent a clear message that they wanted to tighten credit growth, despite the fact that the base rate was the central bank's usual tool to curb rising prices.

"There is no doubt that the refinancing rate will work as well because it ups the costs for banks to borrow from the central bank," he told AFP.

Ratings agencies Moody's and Standard & Poor's downgraded Vietnam's debt rating late last year over worries about the economy, the banking sector and the problems of nearly-bankrupt state-owned shipbuilder Vinashin.

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