Viet Nam Raises Key Rate to 14% to Rein in Inflation

Viet Nam increased the benchmark interest rate for a third time this year to rein in the fastest inflation since at least 1992 and shore up confidence in the currency and stock markets.

The State Bank of Viet Nam raised the base rate to 14% from 12% to stabilize the economy, according to a statement on the central bank's Web site. The Southeast Asian nation also increased the refinancing rate to 15% from 13% and the discount rate to 13% from 11%. The new rates are effective from tomorrow.

Central banks in the Philippines and Indonesia this month increased borrowing costs to tackle surging food and energy prices. Viet Nam last week cut its growth target for this year and said it needed to prioritize getting inflation under control. Consumer prices surged 25.2% from a year earlier in May.

``Asian central banks are finally waking up to the fact that the inflation threat has to be dealt with before the need to support growth,'' said Callum Henderson, head of foreign-exchange strategy at Standard Chartered Bank in Singapore.

The VN Index, a measure of 151 companies on the Ho Chi Minh City Stock Exchange, fell 1.61% to 373 today, the lowest since Feb. 23, 2006. The benchmark has lost almost 60% from the start of the year.

The dong fell 0.04% to 16,297.5 against the dollar as of 3:40 p.m. in Hanoi. The currency has weakened 2.7% in the past three months.

Viet Nam's central bank needs to make borrowing costs higher than the rate of inflation to prevent the economy turning from overheating to bust, James McCormack, Fitch Ratings' head of Asia-Pacific sovereign rating, said on May 30.

Fitch and Standard & Poor's cut their outlook on Viet Nam's foreign-currency credit rating to negative from stable in May, and said the country's banking system may be at risk. (Bloomberg)