Vietnam's central bank Thursday

ietnam Raises Banks' Recapitalization Rate

The Wall Street Journal, 17 February 2011



Vietnam's central bank Thursday raised its rate for recapitalizing banks by 2 percentage points to 11%, but analysts said the government needs to take more aggressive measures if it hopes to bring inflation back to single digits. The move by the State Bank of Vietnam comes after it devalued the dong last week for the fourth time in 14 months and three months after it last raised the rate for recapitilizing banks by one percentage point in early November, when it also raised its benchmark rate on dong-denominated loans to 9% from 8%.



The recapitalization rate is the rate the central bank charges commercial banks when it pumps more capital into those banks. The central bank didn't offer any explanation for its decision or comment on further possible increases in the policy rate. "The move is aimed at slowing down the credit growth, and ultimately taming inflation," said Le Tham Duong, an economist with the Ho Chi Minh City Banking University. However, he said in the near term the move may push up lending rates among commercial banks.



The central bank is targeting credit growth of 23% this year, down from 27.65% in 2010. Last Friday, the central bank devalued the dong by 8.5% against the dollar, a move that could actually stoke inflationary pressure. The move bucked the broader trend in Asia, where most currencies have been rising due to large trade surpluses and authorities have sought to slow the pace of appreciation to protect their export industries. Vietnam's inflation rate rose to 12.17% on-year in January, from 11.75% in December. The country ran a trade deficit of $1 billion in January, following a deficit of $1.294 billion the previous month. "The timing of the rate hike suggests that February inflation data to be released next week will not be favorable," ANZ Bank wrote in a note. The note continued to say that the move would be insufficient to help achieve Vietnam's target of 7% inflation by the end of 2011, and that further rate increases are expected this year.

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