Vietnam Weakens Dong, Raises Rate to Combat Inflation

Vietnam’s central bank devalued its currency and raised interest rates to rein in accelerating inflation and a widening trade deficit that is eroding confidence in the dong.

The State Bank of Vietnam set a dong reference rate for tomorrow that is 5.2 percent lower, at 17,961 per dollar, compared with 17,034 today, it said in a statement on its Web site. Policy makers narrowed the dong’s daily trading band to 3 percent, from 5 percent, effective tomorrow, and increased the benchmark interest rate for the first time since January, to 8 percent.

Vietnam is the first nation in Asia to raise interest rates after inflation accelerated this month. Policy makers around the region are leaving borrowing costs unchanged amid concern higher interest rates will encourage capital inflows that may boost their currencies and undermine financial stability.

“The rate hike is targeted towards giving the Vietnamese dong more support and the devaluation is to help exports,” said Tai Hui, Singapore-based head of Southeast Asian research at Standard Chartered Plc. “The dynamics in Vietnam are completely different from other Asian economies.”

The Southeast Asian nation is trying to sustain economic growth in 2010 and curb inflation, the statement said. The rate increase is to help tightly control credit lending and support economic targets, the central bank said.

Inflation Expectations

Vietnam will also lift the refinancing rate to 8 percent from 7 percent, and the discount rate to 6 percent from 5 percent, according to the statement. The rate increases are effective from Dec. 1.

“They want to make sure that inflation expectations are anchored,” said Jaseem Ahmed, the Manila-based director of the Asian Development Bank’s financial sector, public management and trade division for Southeast Asia. “They are also probably trying to give a sense that people don’t need to worry about substantial movements in the exchange rate.

Consumer prices gained 4.35 percent in November from a year earlier, the biggest increase since May, according to figures released by the General Statistics Office in Hanoi today.

The dong fell 0.06 percent to 17,884 against the dollar as of noon in Hanoi, about 5 percent weaker than the daily reference rate. The currency has depreciated 2.3 percent this year, as all except the Chinese yuan and the Hong Kong dollar have gained amongst 10 Asian currencies tracked by Bloomberg.

‘Odd One Out’

“Most Asian governments and central banks are fighting and resisting currency appreciation and are talking about currency controls,” Standard Chartered’s Hui said. “Vietnam is the odd one out in Asia.”

The benchmark VN Index dropped the most in more than seven months on the Ho Chi Minh City Stock Exchange, falling 4.5 percent, to close at a three-month low of 503.41 on market speculation of the rate increase.

The central bank kept the key benchmark rate at 7 percent since January to help the government meet its 5 percent economic growth target. The economy expanded 6.2 percent last year, the slowest pace in nine years.

The trade deficit widened to $1.9 billion in October, the most since May 2008, from $1.8 billion in September. Inflation may accelerate to 6 percent by the end of the year, Deputy Prime Minister Nguyen Sinh Hung said last week. Credit growth in the 10 months through October reached 33 percent, exceeding the government’s 30 percent full-year target. “There are risks of inflation picking up,” Hung said in a Nov. 18 interview in Hanoi. “Since we wanted to boost economic growth, we injected a large volume of funds to businesses.”

(Bloomberg)

Tags: Vietnam business news, Vietnam finance news, Vietnam interest rate