Vietnam cuts interest rates to support growth

Reuters 3 Nov 2008

Vietnam's central bank said on Monday it was cutting its three main interest rates and lowering the compulsory reserves required on bank deposits as part of efforts to stave off an economic slowdown. The benchmark dong base rate would be cut to 12 percent from 13 percent, effective Nov. 5, the State Bank of Vietnam said.

It will be the second reduction in just over two weeks. The Southeast Asian country has battled inflation and a widening trade deficit for much of the year, tightening monetary policy, but officials appear increasingly concerned that the global credit crisis and looming slowdown could drag down growth.

'Clearly, the focus is shifting to growth from inflation,' said Matt Hildebrandt at JPMorgan Chase Bank in Singapore.

Last week Hanoi estimated the economy would grow 6.7 percent in 2008. Earlier in the year, the government had projected growth of as high as 9 percent. The central bank also said the discount rate at which it buys paper from banks would be cut by one percentage point to 11 percent from 12 percent and the refinancing rate would drop to 13 percent from 14 percent. The central bank uses the refinancing rate for loans to commercial banks. In addition, banks would be required from Nov. 5 to set aside 10 percent on non-term dong deposits and those with terms of less than 12 months instead of the current 11 percent, the bank said. The ratio for compulsory reserves on deposits with maturities of 12 months or longer would be lowered to 4 percent from 5 percent, it said.

For foreign currency deposits with maturities of less than a year the rate was cut to 9 percent from 11 percent, and for maturities of 12 months or more it was cut to 3 percent from 5 percent. The central bank also said on Monday that loan growth in January to October slowed to 19.6 percent from 37.73 percent in the same period last year, while growth in bank deposits slowed to 10.59 percent from 32.97 percent. The bank did not provide the value of the loans and deposits. 'The monetary market and banking activities have stabilised, with interest rates in sharp decline and a surplus in dong funds,' it said. 'Deposits and loans to the economy are expected to pick up,' the bank added. State-run banks began cutting rates on dong loans to prime clients by up to 1.5 percentage points to around 15-16 percent following the central bank's announcement. The central bank raised the base rate three times earlier this year to contain inflation, which approached an annual rate of 30 percent before slipping slightly to an estimated 26.7 percent in October from 27.9 percent in September.