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December 3, 2008

Vietnam to cut rates to boost economy
Vietnam's central bank will cut interest rates by a full percentage point and lower bank reserve requirements from Friday as it continues to take aggressive steps to stave off economic slowdown, reported Reuters.

The cut announced by the government on Tuesday will be the fourth 100-basis-point reduction in each of the country's three benchmark rates since late October.

The base rate will drop to 10 percent from 11 percent, the discount rate used by the central bank to buy debt from banks will be cut to 9 percent from 10 percent and the refinancing rate will fall to 11 percent from 12 percent.

"The rate cut and compulsory reserves reduction are aimed at creating the most favourable conditions for companies and households to do business," the statement said.

The Southeast Asian country battled double-digit inflation and a widening trade deficit for much of the year by tightening monetary policy, but with inflation easing officials are increasingly focusing on the dampening effect of the global credit crisis on growth.

"Vietnam's policy authorities are clearly getting very worried about the economy's growth prospects," economist Prakriti Sofat of HSBC said in an emailed statement.

The central bank is widely expected to bring interest rates down further in coming months. On Tuesday, Hanoi reiterated its estimate that gross domestic product would grow 6.7 percent in 2008. Earlier in the year, it expected 9 percent growth.

In addition to the rate cuts, the State Bank of Vietnam lowered by two percentage points the compulsory reserve requirement for dong and foreign currency deposits, adding liquidity to the system, the government said.

The government statement did not provide details of the actual ratios banks must set aside on dong and dollar deposits.

Commercial banks are now required to set aside 8 percent on non-term dong deposits and those with terms of less than 12 months for the compulsory reserves.

The central bank would pay 9 percent interest to banks for dong reserves that are kept at the central bank, instead of the current rate of 10 percent, the government statement also said.

The central bank uses the refinancing rate to lend to banks.

The central bank raised the base rate three times between February and June to contain inflation, which approached an annual rate of 30 percent before easing to an estimated annual growth of 24.2 percent in November.

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