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Central bank raises interest rate to highest in Asia
Vietnam's central bank has increased the benchmark interest rate to the highest in Asia to cool the quickest inflation in the country since at least 1992, and will allow the dong to weaken.
The State Bank of Vietnam decided to raise the base rate to 14 percent from 12 percent Wednesday to stabilize the economy.
It also lowered the dong’s reference rate Wednesday by 2 percent to avoid currency speculation.
The rate increase may help restore confidence in the benchmark stock index, which has lost almost 60 percent this year and is the world’s worst performer.
Vietnam faces a potential currency crisis because of spiraling inflation, according to Deutsche Bank AG and Morgan Stanley.
“They’re inching toward a tighter monetary stance and taking it in stages to gauge the impact of each move as they do it, which is not a bad way to approach it,” AFP quoted UN Development Program Vietnam chief economist Jonathan Pincus as saying.
“This will draw more saving into the banking system to strengthen the dong.
“This is good news for the market,” Dam Bich Thuy, Hanoi-based chief executive officer of Australia & New Zealand (ANZ) Banking Group’s Vietnam operations, told Bloomberg.
“The move shows that the government is taking action to address investors’ concerns.”
Prakriti Sofat, an economist at HSBC Holdings Plc in Singapore, said, “They seem to be taking the advice that everyone is giving them in raising interest rates.
“Higher rates mean that lending and the economy should slow, which then will depress demand and inflation as well.
“Inflation should peak around the third quarter at around 30 percent and then start declining,” he added.
Depreciation pressure
“The exchange rate is under great pressure although the Vietnamese government is trying to manage that very slowly,” Adam McCarty, chief economist at Hanoi-based Mekong Economics, said.
“They should probably do it faster than they are doing it, although they are trying to manage expectations.’’
The International Monetary Fund (IMF) country chief Ben Bingham said last week the central bank should raise interest rates “to provide adequate returns to savers and bring credit growth and inflation under control.”
Bingham also said the IMF believed that “greater exchange rate flexibility would simplify monetary management and help the central bank better manage shifts in capital flows more effectively.”
The dong declined 1.3 percent Wednesday to 16,613 per dollar, the biggest drop since August 1998.
Morgan Stanley said last month that the dong is poised to weaken because Vietnam’s current-account deficit may widen this year to an “unsustainably large” level.
Stocks slump
Stocks may extend this year’s slump as the government raises interest rates, restraining earnings growth, Mark Matthews, Asia Pacific head of equity strategy at Merrill Lynch & Co. in Hong Kong, said in an interview last week.
The VN Index, a measure of 151 companies on the Ho Chi Minh City Stock Exchange, fell 1.3 percent to 363 Wednesday, extending its record losing streak to 25 days.
“Interest-rate increases are just one of the measures the central bank will take to reduce money in the banking system,’’ Nguyen Anh Tuan, deputy director of investment banking at the Vietnam Bank for Industry and Trade in Hanoi, said.
Inflation hit 25 percent year-on-year in May, and the trade deficit, fuelled by a surge of imports, widened to US$14.4 billion in the first five months of 2008, according to data from the General Statistics Office.
Vietnam has made tackling inflation - driven by surging global energy and food prices and high capital inflows - a top priority while cutting the 2008 economic growth target to 7 percent from last year’s 8.5 percent.
The Southeast Asian nation has said it targets growth of 7 to 7.5 percent for 2009.
The central bank needs to push borrowing costs higher than the rate of inflation to prevent the economy from overheating, James McCormack, Fitch Ratings’ head of Asia-Pacific sovereign ratings, said on May 30.
Thanhnien
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