UPDATE 2-IMF says Vietnam needs further interest rate hikes

Thu Jun 9, 2011 12:42am EDT

Related Topics

* Administrative measures can't substitute for rate hikes -IMF

* Confidence in govt policies "fragile"

* C.bank "must" raise rates if very high inflation persists -deputy gov (Adds central bank comments, context)

By John Ruwitch

HA TINH, Vietnam, June 9 (Reuters) - Vietnam's economy faces "significant challenges" and authorities need to raise policy interest rates further to cope with an upward trend in inflation, the International Monetary Fund said on Thursday.

The government should also do more to reduce the fiscal deficit in support of tighter monetary policy, the Fund said in a statement at a donors' meeting with the government in Vietnam.

Confidence in the government's policies was "fragile", the IMF said, and it was essential that the government send "a strong signal" that it will remain committed to macro-stabilising measures beyond 2011.

Responding to the call, cantral bank deputy governor Nguyen Van Binh said the State Bank of Vietnam "must" put up policy rates again if high inflation persists.

Inflation in Vietnam has been among the highest in the world, quickening to 19.8 percent in May over the same month last year, and is still accelerating.

In the face of soaring prices authorities have increased interest rates several times since late last year, lowered credit growth and money supply targets and made commitments to cut spending and boost state revenues.

But economists say the measures have yet to bite on inflation.

"The immediate challenge will be to respond to the upward trend in inflation, and prevent it from feeding into higher inflation expectations and putting pressure on the dong. This requires further increases in policy rates," the Fund said in a report prepared for the meeting.

ANZ said in a report on Wednesday it expected policy rates to be raised by another 100 basis points. HSBC said in a report on Tuesday more rate hikes were in the pipeline, including a 300 basis point rise in the refinance rate to 17 percent this year.

"I think if inflation is still very high in the forthcoming period of time (then) of course in order to contain inflation I think we must raise policy rates of the State Bank," said Binh, who is widely expected to become governor of the State Bank of Vietnam when a new government is formed in July and August.

He said the policy rate "may be a little bit higher" than the government's new inflation target of 15 percent.

"If the situation is cooling a little bit I think it's a chance for us to keep policy rates the same," Binh added.

The reverse repo rate for open market operations currently stands at 15 percent, the refinance rate is at 14 percent and the discount rate is 13 percent.

CAUTIOUS AND FLEXIBLE

The World Bank echoed the Fund's sentiments in a report on Thursday in Vietnam, saying efforts to stabilise the economy were only half done. "The authorities need to remain vigilant against premature withdrawal of stabilisation measures," it said.

The government has lowered its gross domestic product growth target and increased its full-year inflation target twice so far this year in an acknowledgement of the economic difficulties. After a cabinet meeting last week it said it now expected GDP growth of 6 percent and inflation to end the year at 15 percent.

GDP growth in the first half of this year may quicken to an annual rate of 5.6 percent, from 5.43 percent in the first quarter, the government said on Friday.

On the fiscal side, the IMF said Vietnam needs "a clear deficit reduction path to make the commitments to consolidation more concrete".

The IMF noted that the Vietnamese currency has been trading within its band, and said foreign exchange reserves had started to rise, and were $13.5 billion in May, up $0.9 billion.

The Asian Development Bank reported in April that Vietnam's foreign exchange reserves last year dropped 12 percent from 2009 to $12.4 billion and were enough to cover 1.9 months of imports at the end of 2010.

The IMF said expectations that the dong will again come under pressure remained "entrenched".

On Feb. 11 the State Bank of Vietnam devalued the dong by 8.5 percent, narrowed its trading band against the dollar and later enacted a set of administrative measures to try to fight "dollarisation" of the economy.

The beleaguered currency, which had shed more than 20 percent of its value in the three years leading up to the latest devaluation, has been largely stable recently.

The Vietnamese economy grew 5.3 percent in 2009 and 6.8 percent last year. (Additional reporting by Tran Le Thuy; Editing by Kim Coghill)

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