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Gov’t says interest rates should be in line with 6 pct inflation
Prime Minister Nguyen Tan Dung has asked the central bank to review its benchmark interest rates as inflation eases, the government said in a report on Wednesday.
The State Bank of Vietnam’s benchmark interest rate now is 7 percent, down from 14 percent in October. The last announcement of a change in the rate was made in January. The country’s consumer inflation rate as of March was 11.3 percent, down from a peak of 28.3 percent in August 2008.
To boost economic growth, Prime Minister Nguyen Tan Dung asked the central bank to “reconsider the benchmark interest rate, the refinancing rate and the discount rate so that they will fit in the circumstance where the inflation rate does not exceed 6 percent,” said Nguyen Xuan Phuc, chief of the government office, citing Dung.
Phuc did not specify if Dung was referring to a year-on-year or an average inflation rate, or during what time frame the government envisions inflation slowing to 6 percent. In a report last month, the International Monetary Fund forecast that inflation would slow to 6 percent by year-end.
The State Bank of Vietnam, concerned about a banking system with high costs and also about a further weakening of the dong, currently has an “aversion to cutting rates,” wrote Khalil Belhimeur, a fixed-income strategist at Standard Chartered Bank in Singapore, in a note this week.
The dong has already weakened to VND17,778 per dollar now from VND17,483 at the beginning of the year. The government should “take away people’s anticipation of dong devaluation,” said Ayumi Konishi, the Vietnam country director for the Asian Development Bank (ADB), speaking to journalists Tuesday in Hanoi.
‘Room to cut’
“They should be careful and cut rates in increments, not all at once, but there’s still some room to cut,” said Lawrence Wolfe, director of business development at DongA Securities Co. in Ho Chi Minh City.
An inflation rate of 6 percent implies that the central bank’s benchmark rate may be cut to as low as about 4.5 percent, in order to ensure that commercial bank deposit rates would be positive, Wolfe said.
“Inflation is not the main concern at the moment,” he said, in a telephone interview Wednesday. “Like everyone else in the world, Vietnam wants to get its economy going.”
Many economists believe that further reductions in interest rates could have diminishing returns.
As interest rates were being unwound from October, the pace of growth of bank credit and M2 money supply was slowing, indicating that the rate cuts were having a limited effect, ADB economist Bahodir Ganiev said at a news conference on Tuesday.
Dung asked commercial banks to provide low-interest loans to farmers to help them purchase machinery, material, and household goods such as televisions and motorcycles to boost domestic consumption.
The government also agreed to provide bank loan interest subsidies to new projects by small- and medium-businesses.
Gross domestic product expanded 3.1 percent in the first quarter from a year earlier, the slowest pace on record. The government would submit a revised target of 5 percent growth for the year, down from a previous figure of 6.5 percent, to the National Assembly for approval, Phuc told reporters in Hanoi Tuesday.
thanhnien, Bloomberg
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