Vietnam makes U-turn on rates as inflation bites
The Vietnamese government has sat on its hands over recent weeks while its controlled currency, the dong, continued to slide in value on the black market, amid mounting concerns about inflation and a year-end shortage of dollars.
But it has finally sprung into action, pledging yesterday to inject dollars into the market and not to devalue the dong until early February. It also surprised investors on Friday by increasing the base interest rate by one percentage point to 9 percent.
The rate hike, the first since last December, comes despite the central bank, the State Bank of Vietnam, saying last week that it would leave its benchmark lending rate at 8 percent in order to maintain economic growth.
Since the global financial crisis hit, the government has been pressuring commercial banks to lower their borrowing rates in order to stimulate economic growth but this approach has led to concern about loose money supply and inflation.
Sherman Chan, an economist at HSBC in Hong Kong, said that while the rate increase looked like a policy U-turn, it was a step in the right direction.
"This hike is what they need to contain inflation and to win back investor confidence," she said. "It looked as if they were ignoring concerns about inflation before."
She added that today’s move could be the start of a monetary tightening cycle, which many economists believe is overdue in Vietnam.
"They don’t normally do one off rate hikes," she added.
By Ben Bland - The Financial Times - November 6, 2010