UPDATE 2-Vietnam banks raise rates, stocks fall

(Adds market reactions, comments)

By Ho Binh Minh

HANOI, May 19 (Reuters) - Vietnamese banks boosted interest rates on Monday after the central bank abolished a 12 percent ceiling rate on dong deposits and raised three interest rates over the weekend to fight a surge in inflation.

Annual inflation is galloping at more than 20 percent and the central bank has carried out a number of measures to try to stem the rise in prices.

The latest, announced on Saturday and effective on Monday, underlines the central bank's priority is to combat inflation, analysts said.

"This is a positive step the central bank has made to tighten monetary policy through market-oriented measures, which demonstrates the government's resolution in maintaining the policy priority on inflation control over growth," economist Helen Qiao at Goldman Sachs in Hong Kong said.

But the news weighed on the main Vietnam stock index .VNI on the view that investors would find the higher bank rates more attractive than keeping their money in a market that has fallen 50 percent since the start of the year as inflation has jumped.

The cap on deposit rates was imposed in February to stabilise the banking system after banks started bidding aggressively for deposits when the central bank tightened monetary conditions.

In abolishing the cap, the central bank said banks can fix their own rates on dong deposits and lending at up to 150 percent of a base rate of 12 percent. Previously, a base rate of 8.75 percent had been applied to lending only.

The central bank said it would set the base rate each month but it could also adjust it when necessary.

The central bank also raised its refinancing rate on loans to commercial banks to 13 percent from 7.5 percent and its discount rate, used to buy debt from banks, to 11 percent from 6 percent.

Qiao said the move should help reduce the gap between nominal interest rates and inflation, making deposits more attractive and helping relieve tight liquidity in the wake of the central bank's anti-inflation measures, which have included higher rates and compulsory bank reserves.

SLOWING GROWTH

In response to the central bank's announcements, state-run BIDV, Vietnam's second-largest bank by assets, started offering new rates on dong deposits on Monday.

If offered to pay up to 13.5 percent for dong savings of between six and 12 months, from 12 percent earlier. It offered dong loans at 16.5 percent to 18 percent, up from 13 percent on one-year loans offered in the interbank market on Friday.

Other banks, such as Sacombank STB.HM, followed suit.

The Ho Chi Minh stock index .VNI fell 0.95 percent on Monday, its 11th consecutive fall in a row.

"The lifting of 12 percent ceiling rate on dong deposits will not help the stock market have a U-turn because no matter how much demand grows for Sacombank's shares, it will not improve the demand of the whole market," said Bui Ngoc Long, Marketing Director at International Royal Securities.

Shares in Vietnam's only listed banks fell. Sacombank dropped 1.8 percent and Asia Commercial Bank ACB.HN slipped 2.24 percent.

For weeks, commercial banks have held competitions to win cars, or offered gold and other incentives to lure depositors while dong deposit rates were capped at 12 percent.

Goldman Sachs has forecast Vietnam's economic growth will slow in 2008 to 7.3 percent from 8.5 percent last year. It said the consumer price index would grow 19 percent on average in 2008 from 8.3 percent in 2007.

The fast-growing economy is a favourite foreign direct investment destination but economic risks have increased. Bank credit grew 50 percent last year and real estate prices soared.

Standard & Poor's this month cut its ratings outlook on Vietnam's sovereign rating to negative from stable because of macro-economic concerns. (Additional reporting by Grant McCool; editing by Neil Fullick)