UPDATE 2-Vietnam raises two policy rates to fight inflation

Fri Apr 29, 2011 6:18am EDT

Related Topics

* Inflation hit highest in over two years in April

* Some economists say rates may now be near peak

* Rate rises will help the dong, steadier of late (Adds context, quotes)

By John Ruwitch

HANOI, April 29 (Reuters) - Vietnam's central bank tightened credit for the second time in four weeks on Friday, increasing two policy rates days after the government reported inflation was at its highest level in over two years, but some economists said rates may be near a peak.

The State Bank of Vietnam raised the refinance rate by 100 basis points to 14 percent and the discount rate by the same amount to 13 percent, following increases in the refinance rate and reverse repo rate on April 1.

The new rates would take effect from May 1, the central bank said.

Economists said the increases were needed, given the level of inflation, and would also help buttress the dong , which has bucked a three-year trend and strengthened more than 1 percent against the dollar this week on the interbank market.

"The rate hike is in line with our expectations and shows that the central bank remains focused on controlling inflation. We believe the rate hike will help build confidence further and expect the currency to remain stable with a downward bias," said Prakriti Sofat, regional economist at Barclay's Capital.

Vietnam's government has tightened policy since February by raising rates and clipping its credit growth target to counter some of Asia's worst inflation. Consumer prices climbed 17.51 percent in April, the highest since December 2008, official data showed on Sunday.[ID:nL3E7FP07D]

"This is about where we have rates plateauing in our forecast based on sequential inflation easing and headline year-on-year starting to turn down again in the coming months," said Yougesh Khatri, an economist at Nomura International (HK) Ltd.

"While the policy rate may seem low relative to current inflation the key is that lending rates are significantly positive."

Many economists see inflation continuing to rise into the third quarter before starting to ease.

NOT THE ONLY SOLUTION

Lending rates are around 19-20 percent and businesses have been vocal about the difficulties such high rates are creating, putting pressure on the government.

The government decided this month to grant small and medium-sized firms a one-year extension to pay taxes.

At a government news conference earlier, deputy central bank governor Nguyen Dong Tien told reporters he did not think monetary policy needed to be tightened further, suggesting some disagreement at senior levels of government.

"Monetary policy is not the only solution," Tien said. "It needs to be synchronised with other policies like the budget, prices. Personally, I think monetary policy shouldn't be tightened any more at the moment."

On Monday, the International Monetary Fund's senior resident representative in Vietnam, Benedict Bingham, told Reuters Vietnam was "overdue" for another rate rise to counter inflation and keep inflationary expectations in check.

Inflation has yet to ease, in part because the authorities have also imposed double-digit increases in electricity and fuel prices that economists say are still filtering through.

On Feb. 11 the central bank devalued the dong by 8.5 percent against the dollar and the government followed up with a series of measures designed to "de-dollarise" the economy, including cracking down on the black market , raising dollar reserve requirements and capping dollar deposit rates on April 9.

The central bank gave no explanation for Friday's increase in the refinance and discount rates.

The country's monetary policy is in a state of flux. The reverse repo rate, another rate markets watch closely, was left unchanged at 13 percent on Friday and the base rate, which used to be the benchmark, was left at 9 percent. (Additional reporting by Tran Le Thuy; Editing by Jason Szep and Alan Raybould)

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