Vietnam to weigh rate cuts if Asia's fastest inflation slows

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Vietnam's central bank will leave interest rates unchanged for now and consider cutting them if inflation slows, the government said as it struggles to contain Asia's fastest inflation and sustain economic growth.

"In the immediate future, the central bank will keep its policy interest rates unchanged and will consider reducing them to a suitable range if inflation slows," the administration said in a statement on its website late Thursday.

Asian economies from Vietnam to Taiwan face a growth slowdown as a faltering global recovery crimps demand for exports and undermines investor confidence, adding pressure to stop rate increases. At the same time, a failure to damp price gains threatens to hurt purchasing power and exacerbate the moderation in expansion.

"The Vietnamese government is very worried about the growth outlook," said Christian de Guzman, a Singapore-based assistant vice president at Moody's Investors Service. "In other countries you have the policy space to act on it -- you can cut some rates because inflation isn't high. But with Vietnam, inflation expectations are clearly unanchored."

The benchmark VN Index of stocks rose 0.7 percent Friday, according to data compiled by Bloomberg. It has tumbled 16.6 percent this year, on concern policy makers may fail to stabilize the economy. The dong, which was devalued in February by about 7 percent, has slid 1.1 percent this month.

Lending costs

The government also said in the statement that the central bank will keep the cap on interest rates payable for dong deposits at 14 percent, to help banks lower commercial lending costs. The cap will be removed when possible, it said.

Consumer prices in Vietnam increased 23.02 percent in August from a year earlier, the fastest pace among 17 Asian economies tracked by Bloomberg.

The nation has sought to curb credit growth and the budget deficit to tame inflation. The central bank has raised policy rates this year, including a series of increases in its repurchase, refinancing and discount rates.

The State Bank of Vietnam subsequently cut its repurchase rate for the seven-day term on July 4 to 14 percent from 15 percent. The cut risked confusing the market about the government's desire to fight the climb in prices and restore economic stability, the International Monetary Fund has said.

The Southeast Asian nation will target credit growth of 18 percent to 21 percent next year, according to the statement. The country will aim for money supply growth of 17 percent to 19 percent in 2012, it said.

More flexible

While Vietnam's government is firm in pursuing measures to curb inflation, it needs to be more flexible to accommodate new developments in the economy, Deputy Prime Minister Vu Van Ninh said in the statement.

The government also said the central bank will pursue a "cautious, tight and flexible" monetary policy this year, and reiterated the aim of reducing inflation to less than 10 percent next year.

Inflation likely peaked this month, Australia & New Zealand Banking Group Ltd. said in a note Thursday.

"The main risk to our view is that the central bank declares victory too early and lowers rates too quickly," ANZ said.

Gross domestic product expanded 5.57 percent in the first six months of the year, lower than a revised 6.18 percent in the first half of 2010.

Moody's has said the central bank's "inability to stay the course" with coherent policies is credit-negative. Moody's, Standard & Poor's and Fitch Ratings each lowered Vietnam's sovereign rating lower into so-called junk status in 2010.

Prime Minister Nguyen Tan Dung in February reduced the credit-growth target and ordered a tighter monetary policy as he tries to prevent another downgrade.

Nguyen Van Binh became governor of the State Bank of Vietnam this month, inheriting the challenge of building credibility for the monetary authority from Nguyen Van Giau.

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