UPDATE 1-Vietnam raises rates after pledging no devaluation

Fri Nov 5, 2010 2:01am EDT

Related Topics

* First increase in base rate since Dec. 09

* IMF says it's a "good first step" but more may be needed (Adds context, details)

By John Ruwitch

HANOI, Nov 5 (Reuters) - Vietnam's central bank raised interest rates on Friday, one day after the government pledged steps to stabilise the beleaguered dong VND=VN while vowing not to devalue the currency for at least three months.

Vietnam is also facing growing inflationary pressure.

The State Bank of Vietnam increased its three key rates by 100 basis points each, bringing the benchmark base rate and the refinance rate to 9 percent and the discount rate to 7 percent, it said in a statement on its website, www.sbv.gov.vn.

The move was seen as part of measures to help ease some of the downward pressure on the dong, which has lost value more rapidly on unofficial markets in the past few weeks, fanning speculation of a coming devaluation.

While the base rate has no direct effect on bank interest rates, economists say the central bank can send signals to the market by moving it up or down.

The International Monetary Fund's senior resident representative in Vietnam, Benedict Bingham, said the move was "a good first step" but further adjustments may be needed.

It was the first time the central bank had announced an increase in the base rate since late November 2009, when it concurrently devalued the currency in the face of heavy year-end pressure and rising gold prices. For a timeline see [ID:nSGE6A405C]

That move, which took effect on Dec. 1, 2009, raised the base rate to 8 percent from 7 percent, helping relieve some of the downward pressure on the dong.

Commercial lending rates used to be capped at 1.5 times the base rate, but earlier this year the central bank freed up bank rates, knocking the teeth out of the base rate.

GOOD STEP

On Thursday, a senior state official said the government had decided that there would be no devaluation until at least Tet, the Lunar New Year, which falls in early February 2011.

Le Duc Thuy, chairman of the National Financial Supervisory Commission, also said the central bank would tap the country's foreign exchange reserves to stabilise the market and stop urging banks to lower interest rates, which the authorities had been doing in recent months to support economic growth.

"This is a good first step, but further adjustments in policy rates may be needed," the IMF's Bingham said.

"We agree with Le Duc Thuy that the shortage of dollars is not the issue per se, as the trade deficit, though large, is more than financed by remittances, FDI, and ODA inflows," he said.

"Instead, the authorities needed to address concerns that monetary policy was not dealing decisively enough with high inflation and the pressure on the dong. They have also needed to re-assure investors that the government is fully committed to fiscal consolidation."

Inflation is another problem for the authorities, and Thuy said the state wanted to avoid devaluing the dong in part to avoid making inflation worse.

The consumer price index rose 1.05 percent in October from the month before, after increasing 1.31 percent in September from August, the government statistics office said. (Editing by Kazunori Takada)

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