Key rate remains, inflation ‘no concern’: Vietnam central bank

Key rate remains, inflation ‘no concern’: Vietnam central bank

A noodle vendor waits for customers at a market in Hanoi. The central bank chief has said the key interest rate would not change this month as he was not greatly concerned about inflation, even though the central bank has injected money into the market to improve liquidity.

The benchmark interest rate will remain unchanged at 8 percent through February, State Bank of Vietnam Governor Nguyen Van Giau said at a meeting in Ho Chi Minh City Tuesday. This is the second straight month the central bank has maintained its key interest rate after an unexpected increase that came into effect December 1 amid signs of quickening inflation. “Although inflation is rising, at the moment, the government still needs to maintain the interest rate at a reasonable level to support economic growth,” Le Ba Hoang Quang, vice director of Sacombank Securities Inc.’s Hanoi branch, told Bloomberg. He said supporting growth was especially important because the government’s stimulus package had “more or less ended late last year.” Vietnam is trying to boost economic growth while preventing accelerating inflation from eroding confidence in the country’s assets. The government Monday raised US$1 billion in its second international bond sale, and the benchmark stock index saw its biggest gains in three weeks on the same day. Policy makers will also keep the refinancing rate at 8 percent and maintain the discount rate at 6 percent, according to a statement on the central bank’s website Tuesday. Inflation target “If the central bank keeps rates unchanged, it shows that inflation is at a controllable level,” said Le Van Minh, head of the Ho Chi Minh City branch at Agribank Securities Joint-Stock Co., the brokerage unit of Vietnam’s biggest bank. The government has set a 7 percent target for inflation this year. January’s inflation accelerated for a fifth month to the fastest pace since April, driven by rising prices for food and construction materials. Consumer prices rose 7.62 percent in January from the same month last year, according to figures released Tuesday by the General Statistics Office in Hanoi. “Inflation risks are rising,” wrote Johanna Chua, head of Asian economic research at Citigroup Inc. in Hong Kong, in a research note on January 22 that cited increasing food, transportation and construction material prices. Vietnam needs to take “significant” action on interest rates to restore confidence in the dong, she said. “Once inflation gets into the double digits, it’s at the point where you have to consider policy changes,” said Adam McCarty, chief economist at Mekong Economics in Hanoi. “The stimulus package that Vietnam’s government introduced and the credit growth last year are a large part of the inflation story.” Vietnam last year introduced stimulus spending it valued at about $8 billion in an attempt to boost economic growth that slowed to 3.1 percent in the first quarter. The economy expanded 5.32 percent in 2009, the slowest pace in a decade. The government aims to quicken growth to 6.5 percent this year. Phan Chi Thanh, deputy head of the international relations department of the Government Office, said Wednesday that Vietnam’s 2010 monetary policy would “be conducted on the basis of gradual tightening.” The central bank has set the target for credit growth at 25 percent this year, down from 37.7 percent in 2009. Liquidity issue Governor Nguyen Van Giau told the meeting on Tuesday that banking system liquidity was not a substantial problem at the moment. “The central bank will be proactive in ensuring sufficient liquidity in the system. Banks need to watch for signs from us,” he said. “The central bank will manage the money market in a sophisticated way to avoid a strong impact on the market.” Giau said the central bank recently lowered the compulsory reserve ratios for foreign-currency deposits at banks. “By doing this, money will be released slowly into the market and we won’t cause any large impact,” he said. The mandatory reserve ratio, the amount of money that banks need to set aside to cover deposits, was lowered to 4 percent for deposits of less than one year, from the current 7 percent, and to 2 percent for deposits of more than one year, from 3 percent at the moment. The new ratios will be effective from February, the statement said. “Interest-rate competition at banks is not healthy and not normal at times,” Giau said. “Banks violated the rules when they raised deposit rates and then charged extra fees.” He said the central bank would inspect lenders whose outstanding loans are 20 percent more than their total deposits. The central bank wants to allow lenders to negotiate interest rates with clients, but Vietnamese law currently prohibits such a move. Giau said he wanted to move toward negotiated rates “the sooner the better,” but it would depend on the government and the National Assembly. “At the moment banks can decide lending rates for consumer loans and some feasible projects. But we think banks should be able to lend at 10 percent to 15 percent or even 30 percent depending on the level of risk. This will allow everyone to have access to credit, just at different borrowing costs.” Source: Thanh Nien, Agencies