Vietnam Cuts Key Rate to 7% to Buoy Slowing Economy
Vietnam’s central bank cut the benchmark interest rate to 7 percent as the government struggles to buoy an economy which expanded at the slowest pace in almost a decade last year amid the global financial crisis.
The State Bank of Vietnam reduced the key rate from 8.5 percent, effective Feb. 1, according to an e-mailed statement from the bank today. Policy makers also lowered the refinancing rate to 8 percent from 9.5 percent, and trimmed the discount rate to 6 percent from 7.5 percent.
The sixth rate cut since October is intended to force bank lending rates lower, stimulating domestic investment and consumption. HSBC Holdings Plc on Jan. 5 forecast that Vietnam’s dependence on foreign direct investment flows and exports will put the nation’s 2009 economic growth under significant pressure.
“The rate cut is definitely aimed at stimulating production and exports,” said Quach Manh Hao, Hanoi-based deputy director of Thang Long Securities Co. “It will help the stock market too as a lower interest rate will divert investors from depositing money in banks to buying shares on prospects the economy may recover later this year.”
The VN Index, a measure of 172 companies on the Ho Chi Minh City Stock Exchange, rose for a second day today, climbing 2.09, or 0.7 percent, to close at 303.21. The gauge was the worst- performing in Asia last year, along with China’s CSI 300 Index.
Slowing Inflation
Inflation, which slowed to 17.5 percent in January, the lowest level in almost a year, and a 24 percent slump in exports, have provided the opportunity for the central bank to slash the rate further.
“The current interest rate is too high compared with inflation rate,” said Pham Do Chi, deputy managing director of Ho Chi Minh City-based Vinacapital Investment Management Ltd., who expects the central bank to lower the rate to 6 percent as early as next month.
Benchmark bonds rounded out a third weekly gain. The yield on the five-year note dropped 27 basis points to 8 payday loans.54 percent this week, according to a fixing price from banks compiled by Bloomberg. A basis point is 0.01 percentage point.
The dong increased 0.03 percent today to 17,477 against the dollar. The currency last year recorded the biggest yearly drop in a decade, losing 9.3 percent as the government devalued the currency to help exporters.
Limiting Global Impact
“The purpose of the rate cut is to carry out the government’s urgent measures to prevent the economy from slowing down, sustain production and business, and create employment for workers amid the further impact of the global financial crisis,” the State Bank statement said.
Vietnam’s economy may expand at 5.4 percent this year and inflation will decelerate to 5 percent in the middle of this year and average 9.5 percent, Thomas Tobin, chief executive of the Vietnam unit of HSBC said on Jan. 13.
“The rate cut was expected, and is part of the current series to take rates down to affordable levels,” said Fiachra MacCana, head of research at Ho Chi Minh City Securities Corp. “The move, while welcomed by industry, may not lead to higher credit growth unless interest-rate spreads for banks can be improved.”
Although the economy is slowing, banks are flush with liquidity because of dwindling demand for loans and high interest rates, Thanh Nien Daily reported Jan. 13.
The central bank also reduced the interest rate it pays on compulsory bank reserves in dong to 3.6 percent from 8.5 percent, the statement said, pumping out more cash for banks to lend.
Vietnam’s economy expanded 6.23 percent last year after growing a record 8.5 percent in 2007, according to the General Statistics Office. That was the slowest since the economy grew 4.77 percent in 1999.
Filed under: economics by Guru