Vietnam cuts key rates after inflation slows

HANOI (Reuters): Vietnam’s central bank cut key rates on dong loans and deposits for the first time in nearly three years, helping ease the burden of high operating costs faced by businesses after inflation eased last month.

The State Bank of Vietnam (SBV) as expected cut the refinance rate, or the rate at which it lends to commercial banks, to 14 percent from 15 percent, trimmed the discount rate, or the annualised rate used in buying treasury notes from banks, to 12 percent from 13 percent.

Many domestic companies have complained that dong lending rates charged by banks, which were as high as 18-20 percent in the past year, have hurt their profits.

The central bank also lowered the cap on dong deposit rates banks can charge to 13 percent from 14 percent, and the cap on non-term dong deposits and with terms of less than one month to 5 percent from 6 percent.

The new rates will come into effect on Tuesday, the central bank said in a statement, citing “a declining trend of inflation and supply and demand of funds on the market”.

The announcement was in line with market expectations, except for the base rate. Last week Governor Nguyen Van Binh said the base rate, along with the deposit rate cap, would be cut by one percentage point.

“The SBV’s decision to cut interest rates was a move Fitch was expecting given that inflation pressures have shown stronger signs of easing recently,” said Art Woo, a director in Fitch Ratings’ Asia-Pacific sovereigns team.

The central bank last cut both rates in April 2009.

On Monday the central bank kept unchanged at 14 percent the benchmark reverse repurchase rate in open market operations (OMO), though it is expected to ease on Tuesday when the other new rates take effect.

The rate used for loans in OMO was last cut in July 2011 from 15 precent previously.

The stock index on Vietnam’s main market, the Ho Chi Minh Stock Exchange, closed down 0.95 percent at 428.02 points on Monday after news of the rate cuts. It has gained 21.7 percent so far this year.

The dong eased slightly to 20,810/20,860 per dollar at 0555 GMT on Monday after the central bank’s announcement, from 20,800/20,860 early in the day.

The rate cuts were announced after Vietnam said its annual inflation rate for February slowed to 16.44 percent from 17.27 percent in January.

Inflation has been easing since a peak of 23.02 percent in August 2011, the highest since an annual rate of 24.22 percent in November 2008.

The Vietnamese government has projected to keep the annual inflation at 9 percent this year, but financial experts said it would be tough to achieve the target after fuel retail prices were raised by up to 12 percent last week.

Financial experts have also said that a lower credit growth target planned for this year will relieve pressure on banks to raise funds, helping them cut their deposit rates. The central bank has set credit growth targets for individual banks in Vietnam this year within a range of between zero and 17 percent, after loans rose nearly 11 percent last year from 2010