Viet Nam raises interest rates to fight inflation

Viet Nam raised interest rates from Monday in a move that aims to tackle double-digit inflation by strengthening the dong, the local currency, putting money into banks and reducing credit growth.

The State Bank of Viet Nam increased its base rate to 12% from 8.75%, and allowed commercial banks to offer depositors rates of up to 150% of the benchmark rate, or 18%.

Viet Nam has suffered double-digit inflation for half a year. Consumer prices surged more than 21% year-on-year in April, driven mainly by food and energy prices, fuelling popular anger and labour unrest.

The communist government has made tackling inflation a top priority, while cutting the economic growth target for the year to 7.0% from last year's 8.5% increase in gross domestic product.

Jonathan Pincus, the UN Development Programme's chief economist in Viet Nam, said the interest rate increase was an anti-inflationary measure that would strengthen banks and the value of the Vietnamese currency.

'A problem when you get into inflation is that people expect the currency to devalue and instead buy gold or dollars or property,' Pincus said. 'It becomes a self-fulfilling prophecy, because if fewer people want to hold the currency, there is less demand for it and the value goes down.'

Higher interest rates, he said, strengthen the dong and further fight inflation by raising the cost of borrowing, thus limiting the rapid credit growth that has increased the money supply.

Most Vietnamese commercial banks on Monday increased their interest rates for savings accounts to around 14%, Viet Nam state television reported. (Thomson Financial)