Vietnam Money-Further tightening monetary policy seen

HANOI Mon Feb 28, 2011 3:10am EST

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HANOI Feb 28 (Reuters) - With inflation likely to remain high, the State Bank of Vietnam is considering tightening monetary policy further, possibly by raising banks' reserve requirements, a senior government advisor said on Monday.

The central bank already raised two key interest rates this month as part of a package of monetary and fiscal steps by the government to ease price pressures, but with some lending rates near 20 percent economists say there is little room for further interest rate hikes.

"Raising reserve requirements is now on the cards," said Cao Sy Kiem, a member of the National Monetary and Fiscal Policies Advisory Council, which advises the prime minister.

"The reasonable thing to do now is to keep interest rates relatively stable," he said, stressing authorities were considering several options.

Before taking any steps, though, Kiem said the central bank needed time to carefully consider the liquidity and current level of reserves of the country's banks.

Chairman Le Duc Thuy of the National Financial Supervisory Commission, and deputy chairman Le Xuan Nghia, have also urged the State Bank to raise reserve requirements.

Kiem did not give a likely time frame, or say by how much the central bank might move reserve requirements.

Vietnam's reserve requirement ratio now ranges from 1 percent to 3 percent, depending on the type of lender and the loans they offer.

After months of trying to treat worsening macroeconomic ills with little more than rhetoric, the authorities started to take action in February -- devaluing the currency, raising two key interest rates and vowing fiscal discipline.

The Vietnamese government publicised a set of measures on Thursday to address a situation Deputy Prime Minister Nguyen Sinh Hung called "urgent", aiming to curb inflation and stabilise the macroeconomy.

Vietnam is facing the highest inflation in the region, with February's annual inflation hitting a two-year high of 12.31 percent. .

After the government's macroeconomic rebalancing package was announced, the SBV said it would keep monetary policy "flexible" and focus on using four major tools: rates, open market operations, refinancing activities and reserve requirements.

The government has required that big state-owned firms sell all the foreign currency they have to banks, and the state-run Vietnam Economic Times newspaper said that could pump $5 billion to $6 billion a year to circulation.

"This year's inflation is a result of foreign exchange rate fluctuations and extended public investment, so forcing state-owned groups to sell dollars to banks and restricting the widespread use of dollars are useful," said Vo Van Minh, Director of Research and Investment Advisory, in Lien Viet Securities Co.

MARKET SUMMARY - Feb 28 Feb 21 Change

(pct) VND onshore interbank quotes 20,875 20,875 0.00 VND unofficial 21,950 22,200 1.14 Ho Chi Minh Stock Exchange index 461.37 483.68 -4.61 Hanoi Stock Exchange index 95.92 96.58 -0.68 (VND quotes in the summary are bid rates).

NEWS HIGHLIGHTS

- Vietnam is requiring major state-owned companies to sell all their foreign currency to banks, according to a report on a government website on Thursday, in an effort to support the beleaguered dong .

- Vietnam will cut money supply (M2) growth to 15-16 percent this year from an initial target of 21-24 percent, part of a series of steps to curb double-digit annual inflation. (Reporting by Ngo Thi Ngoc Chau; Editing by John Ruwitch)

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