Vietnam hikes rates to cool double-digit inflation
Friday, 01 February 2008

Agence France-Presse . Hanoi

Vietnam’s central bank Wednesday said it would raise benchmark interest rates for the first time since December 2005, battling double-digit inflation which has sparked popular anger and labour unrest.

Aiming to cool bank lending, the State Bank of Vietnam will from Friday raise the base rate, used by commercial banks to calculate loans, from 8.25 to 8.75 per cent, said a statement on the bank’s website.

The State Bank will also raise the refinancing rate, at which the central bank lends to commercial banks, from 6.5 to 7.5 per cent, and the discount rate from 4.5 to 6.0 per cent, the statement said.

‘It’s a step in the right direction,’ the UN Development Programme’s chief economist in Vietnam, Jonathan Pincus, told AFP.

‘Many economists have been saying we think the economy is overheating and that an interest rate move would be warranted to encourage savings and slow down the growth of credit, which many see as the main driver of inflation.’

The International Monetary Fund last year urged Vietnam to limit credit growth, and the government has set a goal of keeping annual inflation below gross domestic product growth, which hit nearly 8.5 per cent in 2007.

Spiralling food and consumer prices — driven up by a cash influx amid Vietnam’s rapid economic growth — have hit the poor the hardest and fuelled a surge in labour strikes demanding higher wages.

In January, the second month of double-digit inflation, thousands of workers have gone on strike at scores of foreign owned plants, such as South Korean and Taiwanese textile and footwear factories around Ho Chi Minh City.

The state-run General Statistics Office estimated consumer prices rose 14.1 per cent in January from a year earlier, driven up mainly by food and construction material costs, ahead of next week’s Tet lunar New Year. ‘Every year coming up to Tet we see a rise in prices,’ said Pincus.

‘It’s like Christmas in Europe when people tend to spend a lot of their disposable income and goods fly off the shelves.’ Pincus said especially the poor worried about the sharp rise in the prices of basic necessities like food and fuel, and that ‘there is a desire by the government to preserve the real purchasing power of the poor.’

‘They see it’s perhaps time now to cool down the economy a bit and get prices under control and then continue with a sustainable growth path.’

The communist government has tackled inflation on several fronts — recently also ordering banks to increase their dong and foreign currency reserves, the proportion of funds they must hold relative to loans.

Vietnam has also taken steps in its exchange rate policy, allowing the dong to marginally gain against the dollar.

Vietnam has long effectively pegged the dong at around 16,000 to the dollar, while many other Asian countries have floated their currencies, helping Vietnam sell goods cheaply in the United States, its biggest export market.

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