The bank announced Thursday that it was keeping the rate at 8 per cent. The state-run Vietnam News reported that observers had expected a rate increase after monthly inflation hit 1.96 per cent in February.

But economist Vu Dinh Anh, acting head of the government's Institute for Research on Markets and Prices, said inflation in January and February was not high in the context of the traditional bump in prices surrounding the Vietnamese Lunar New Year, or Tet.

Inflation in early 2009 was unusually low because of the global economic slowdown, but in the high-inflation year of 2008, the figure for February reached 3.56 per cent while in 2007 it was 2.2 per cent.

"The thing we should be paying attention to is the inflation rate in March," Anh said. If the consumer price index rises rapidly in March, he said, tightening monetary policy would be necessary.

Tran Dinh Thien, director of the Vietnam Economics Institute, said hiking the prime rate now could be counterproductive.

"Raising the rate at this time will create the psychological sentiment that the government is losing control of the economy," Thien said.

Adam McCarty of economic consultants Mekong Economics said the government had already effectively raised the interest rates for some borrowers at the beginning of the year when it ended 4-per-cent interest subsidies for short-term loans it had been paying as part of a recession-fighting stimulus package.

Analysts have warned that Vietnam risks a serious inflation spiral because of credit expansion of 37 per cent in 2009. The increase was driven largely by government stimulus spending intended to counteract the global economic slowdown.

The government aims to hold inflation below 7 per cent in 2010, but many observers argued that target would be hard to meet after the price increases recorded so far.

Deutsche Presse Agentur - February 26, 2010