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NEWS UPDATES 30 November 2009

Vietnam’s central bank to raise basic rate to 8%

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The State Bank of Vietnam (SBV) has announced some measures to strongly intervene in the local monetary market, which, reported, will see the bank increase the basic interest rate and adjust the exchange rate.

Economists say this is an essential step to stabilise the current economic situation. The SBV decided to increase the basic interest rate from 7 to 8 percent and allow commercial banks to offer an interest rate of 11 percent to mobilise capital, while ensuring their lending ability and liquidity.

The Standard Chartered Bank reports that the increase in the basic interest rate is a good signal for the dong currency (VND), but there are still some negative movements in the monetary flow. The balance of payment in the short term may continue to put pressure on the exchange rate between the VND and US dollar as the foreign direct investment (FDI) inflows are on the decline. Moreover, overseas remittance cannot help settle the country’s trade deficit.

Tai Hui, head of the Standard Chartered Bank’s Asian research department, says that there are two factors that put pressure on the devaluation of the VND. First, the increase in the price of gold makes local investors pay more attention to gold than the Vietnamese currency. Second, the trade deficit may reach more than $2 billion a month. Although this level is lower than in the first half of 2008 (about $2.5-3 billion), it has raised great concern about the balance of payment, especially when FDI and overseas remittances are forecast to increase slightly.

The SBV’s decision to limit the range of the exchange rate has reduced the gap between the bank’s officially-listed rate and the “black market” rate.

According to Tai Hui, the VND-US dollar exchange rate will stand at around VND18,500/US dollar by the end of 2009 and then increase to VND18,600/US dollar by the end of the first quarter of 2010, VND18,800/US dollar by the end of the second quarter, VND18,900/USD by the end of the third quarter and VND19,000/US dollar  by the end of 2010.

Regarding the increase in interest rates, Tai Hui says it is the beginning of a new trend to raise the interest rate. “Currently we predict that the basic interest rate will surge to 10 percent by the fourth quarter of 2010, higher than our previous prediction of 9 percent. This may lead to an increase in the lending interest rate to around 15 percent,” he adds.


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