"The domestic economy is still facing difficulties. In the second half there is a threat of the recurrence of inflation, so macro policies including monetary policy will be considered to help effectively manage the economy," Giau said in a report.

He did not forecast what end of the year inflation might be but urged banks to lend more to production-oriented projects while reducing credit to non-manufacturing sectors.

The government has said it aimed to keep inflation this year at around 7 percent.

In June, annual inflation sunk to its lowest level in more than five years at 3.94 percent following a drop of nearly 10 percent in food prices.

But economists have suggested the government needs to remain vigilant about inflation, which went as high as 22 percent last year, as it forges ahead with economic stimulus measures, including loan subsidies that are buoying bank lending.

In recent months, as inflation has cooled, the central bank has kept its policy interest rates steady, with its benchmark base rate unchanged at 7 percent since February.

Reuters - July 17, 2009