Vietnam Cuts Key Rate to Damp Impact of Global Crisis (Update2)

By Nguyen Dieu Tu Uyen and Van Nguyen

Oct. 20 (Bloomberg) — Vietnam cut the benchmark interest rate to 13 percent to limit the “negative impact” of a possible global recession on the Southeast Asian economy.

The central bank reduced the key rate from 14 percent, effective from tomorrow, according to a statement on the State Bank of Vietnam’s Web site. Vietnam’s benchmark rates are still the highest in Asia, along with Pakistan’s, as the government tries to slow inflation from 27.9 percent.

“If they are doing this now, they must feel very comfortable that inflation is under control,” said Alain Cany, the Ho Chi Minh City-based chairman of the European Chamber of Commerce in Vietnam. “With inflation looking to be more under control, and given the world situation, I don’t think this damages the central bank’s credibility.”

Lower interest rates will make it easier for companies to borrow money, bolstering company profits and helping the government to meet its growth target. India today cut its key rate for the first time since 2004 to protect Asia’s third- largest economy from the global financial crisis.

Vietnamese policy makers also lowered the refinancing rate to 14 percent from 15 percent, and the discount rate to 12 percent from 13 percent, according to the statement. The central bank doubled the interest rate it pays on compulsory reserves for banks to 10 percent.

Global Financial Crisis

“Although the Vietnamese economy isn’t yet showing signs of a recession, we have seen some impact of the deepening global financial crisis,” said Nguyen Thi Kim Thanh, a deputy director of the bank’s monetary-policy department in Hanoi. “It’s now time for the central bank to do something to prevent the economy from slowing further.”

The State Bank of Vietnam will also buy back 20.3 trillion dong ($1.2 billion) of compulsory bills, starting from tomorrow, depending on banks’ individual need for capital. The bank sold the bills in March to reduce liquidity and constrain inflation.

Policy makers have been under pressure from companies to reduce borrowing costs, after three rate increases this year. Prime Minister Nguyen Tan Dung said last week that Vietnam may miss its target of 7 percent economic growth for 2008 as companies are finding it difficult to raise money. Gross domestic product expanded 8.5 percent last year.

Slowing Inflation

Inflation slowed last month from 28.3 percent in August. Along with lower-than-expected credit growth recently, the central bank has some scope to consider lowering rates, Le Xuan Nghia, director of the central bank’s banking development strategy department, said in a telephone interview on Oct. 17.

The central bank may release inflation figures for October as early as this week.

Vietnam today lowered gasoline prices for a third time this month after crude oil declined, reducing pressure on inflation. The government cut the price of 92-RON gasoline, the most commonly used grade, by 3.1 percent to 15,500 dong a liter from 16,000 dong.

The dong had the biggest drop in more than a month on speculation the rate reductions will increase liquidity in the banking system.

The currency declined 0.33 percent to 16,660 versus the dollar as of 4:30 p.m. in Hanoi, according to data compiled by Bloomberg. The dong last fell more on Sept. 19, when it weakened 0.45 percent.

“This is a positive move by the central bank because it will make it easier for companies to get loans,” said Le Dac Son, Hanoi-based chief executive officer of Vietnam Joint-Stock Commercial Bank for Private Enterprises. “It is a signal that the lending rate will be cut further.”

To contact the reporters on this story: Nguyen Dieu Tu Uyen in Hanoi at uyen1@bloomberg.net; Van Nguyen in Singapore at vnguyen23@bloomberg.net

http://www.bloomberg.com/apps/news?pid=20601080&sid=a667b56VDj50&refer=asia

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