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The Vietnam News

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Vietnam raises rates to curb inflation, credit

HANOI - Vietnam's central bank said on Wednesday it will raise interest rates by up to 1.5 percentage points from Feb. 1 as it moves to contain soaring credit growth and inflation.

The central bank last changed its three key interest rates in December 2005, but with double-digit inflation in December and January, analysts said the rate rise was one anti-inflationary measure the Communist Party government could take. The base rates, used by commercial banks to calculate their dong lending rates, will rise to 8.75 percent from 8.25 percent now, the State Bank of Vietnam said in a statement. The discount rate, used by the central bank in buying back securities from commercial banks, will rise to 6 percent from 4.5 percent. The re-discount rate at which the central bank lends to banks will go up to 7.5 percent from 6.5 percent.

"The purpose of raising the rates is to establish a reasonable relation between the central bank's interest rates and the market rates, and to increase the effectiveness of interest rate-linked monetary measures," the bank said. The central bank said earlier this month it aimed to limit credit growth to 30 percent this year after lending jumped 37.8 percent last year. The International Monetary Fund late last year urged Vietnam to rein in credit growth.

Bankers in Ho Chi Minh City told Reuters their banks had been asked by the central bank to keep loan growth this year under 25 percent. Adam McCarty, chief economist of Mekong Economics consultancy in Hanoi said the move was "clearly an attempt to reduce inflation and there might be some negative impact on growth but probably not much." Vietnam's economy is growing at nearly 8.5 percent a year and is one of the fastest expanding economies after China.

The central bank announcement came two days after the government estimated January consumer prices would jump 14.1 percent from a year earlier. In December, prices rose 12.6 percent compared with December 2006. Consumer prices are rising at the fastest rate in 12 years due to soaring costs of food, fuel and housing and higher than in other emerging Asian economies. "We at least see the central bank leaning toward inflation management and tweaking the currency policy," said Prakriti Sofat, Asian Economics analyst at HSBC in Singapore. "Yes, growth is important but the quality of growth also matters," she said.

By Ho Binh Minh & Grant McCool - Reuters - January 30, 2008.