Vietnam to hold key interest rate in March

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Vietnam's central bank said on Thursday it would leave its key interest rate unchanged at 8.0 percent in March, despite some market expectations that it would need to tighten policy to stem rising inflation.

It did not explain the decision, which came a day after the government reported annual inflation hit its highest level in 10 months in February. Nor did it mention other rates the central bank sets.

The announcement keeping the base rate unchanged for the fourth consecutive month was published on the central bank's website, www.sbv.gov.vn.

Some economists had expected the base rate to be increased in March. Annual inflation in February was 8.46 percent. The government is aiming to hold it below 7 percent in 2010.

HSBC said in a note on Wednesday after the inflation data that it expected the state bank to increase the base rate by 100 basis points in March.

HSBC economist Wellian Wiranto said via email on Thursday that an increase could now come in April.

"It appears that they are still waiting to assess the domestic liquidity situation, now that the 'Tet effect' starts to phase itself out," he said.

Inflationary pressures in Vietnam tend to be high around Tet, the Lunar New Year holiday, which this year ran from Feb. 8-12, so the authorities may be waiting to look at the March data.

Liquidity can also be tight in the run-up to the holiday and the central bank added funds this year to offset that.

Vu Thanh Tu Anh, director of research at the Fulbright School in Ho Chi Minh City, said he was not surprised the base rate was left untouched because he believed the central bank did not yet consider inflation to be a major risk.

Anh, however, said it was a "threat" that the government should tackle by lowering credit growth and trimming investment.

Rising inflation bodes ill for the dong currency, which has been under persistent pressure against the dollar.

The central bank devalued the currency by more than 3 percent this month after a devaluation of more than 5 percent in late November, which was accompanied by an increase of 100 basis points in the base rate to 8 percent.

Tighter monetary policy could upset Vietnam's stock markets. The Ho Chi Minh Exchange index is already down more than 9 percent from its 2010 high.

Source: Reuters

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