Vietnam's Feb foreign reserves rise, rate cuts in sight

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Vietnam's foreign exchange reserves at the end of February were up 20 percent from the end of 2011, the central bank said, helping to improve liquidity in the banking system and maintain a steady exchange rate.

The State Bank of Vietnam said in a statement that it had bought foreign currencies "to ensure the market balance".

"The situation with liquidity in banks will improve... ensuring no pressure on inflation, no pressure on the foreign exchange market," the statement said. Foreign exchange reserves rose around 50 percent last year.

Vietnam has been battling soaring inflation, which peaked at 23 percent last August, with high interest rates to curb borrowing. It aims to bring down annual inflation this year to 9 percent.

The reserves statement came after the central bank governor was quoted on Tuesday as saying interest rates would soon fall, with a 1 percentage point cut in the base interest rate.

Foreign reserves rose after local banks sold dollars for dong to take advantage of the higher interest rate of dong deposits, a banker in Ho Chi Minh City said.

Dong deposits have yielded about 14 percent in the past year, while a ceiling on the interest rate for dollar deposits was cut to 2 percent in June 2011 from 3 percent earlier.

"The central bank buying dollars to boost the foreign reserves has contributed to keeping stable the exchange rate," the banker said.

"It also helps improve public sentiment and people can part with their dollar holdings," he said, noting that the stable exchange rate in recent months was also a result of better government control of the gold market.

The dollar is used to pay for gold smuggled into Vietnam. Both the currency and the precious metal are used by residents as personal reserves.

The rise in foreign reserves, which the Asian Development Bank and International Monetary Fund both estimated at $12.4 billion at end-2010, came after Vietnam in January posted its first trade surplus since July 2011. The trade balance returned to a deficit in February.

The central bank statement noted that some international agencies have urged Vietnam not to adopt looser policies while there was a risk of high inflation.

"Easing monetary policy will help the economy achieve the government's 6 percent GDP growth target this year," the Australia and New Zealand Banking Group said in a report on Wednesday.

"However, we would have preferred the SBV to wait until the end of the month, or start cutting rates by less than 100 basis points to ensure inflation expectations remain under control in March," it said.

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