Vietnam expand rates again to fight inflation

HANOI: Vietnam has raised interest rates for the second time in less than three weeks a move which analysts say shows a stronger commitment to fighting rampant inflation.

The State Bank of Vietnam, in a notice issued late Tuesday, said its refinancing rate had risen to 12 percent.

That followed an increase on February 17 to 11 percent from nine percent.

In its latest action the central bank also lifted its discount rate to 12 percent, from seven percent, but left the base rate at nine percent.

"The gradual tightening of monetary policy indicates that both the SBV and the government are clearly targeting a reduction in inflation by de-prioritising economic growth," Daiwa Capital Markets said in a briefing note.

ANZ Bank added the latest rate increases show "that the authorities are now acting more aggressively and proactively against inflation."

Although the base rate has been Vietnam's traditional policy tool it is more of a "signal", but perhaps has not fulfilled its role, said Vishnu Varathan, Singapore-based economist at Capital Economics consultancy.

He told AFP the increase in the refinancing rate sends a very clear message that commercial banks will have to prioritise where they channel financing.

He said this backs up a central bank directive last week that, among other measures, seeks to limit the proportion of loans for "non-productive sectors", notably property and stocks.

Higher refinancing rates increase the cost for banks that borrow from the central bank to supplement their capital, while the discount rate applies to more urgent borrowing.

Analysts say Vietnam's February inflation rate of 12.31 percent year on year was the highest in two years. It is also far above the rates in Vietnam's neighbours.

Pledging that fighting inflation is its top priority, government has unveiled measures to rein in prices and stabilise the economy, which is facing a complicated mix of challenges.

These include a struggling currency and a trade deficit that reached an estimated $12.4 billion last year.

Capital Economics said increases in subsidised petrol prices late last month and electricity prices on March 1, could add as much as three percentage points to annual inflation, which it expects to peak above 15 percent.