Vietnam Raises Its Benchmark Interest Rate to 12% (Update2)


By Nguyen Kieu Giang


May 17 (Bloomberg) -- Vietnam will raise its benchmark interest rate,
lifting the maximum return that commercial banks can offer depositors
to 18 percent a year, the Southeast Asian nation's central bank said.

The
State Bank of Vietnam will increase the base rate to 12 percent from
8.75 percent on May 19, according to a statement released in Hanoi
today. Under central bank regulations, banks cannot offer savers rates
exceeding 150 percent of the base rate.

Vietnam has sought to tame accelerating inflation
by tightening credit and cutting the supply of money. Consumer prices
that surged 21.4 percent in April, the most since at least 1992, and
rate restrictions have hurt banks' ability to attract deposits.

``Today's move should help to ensure that banks have the mechanism available to them to mobilize more deposits,'' said Dominic Scriven, a director at Dragon Capital, a Ho Chi Minh City-based fund manager. ``That will help financial stability.''

The
12 percent cap on deposit rates before the rate rise has meant that
real interest rates have been negative because of inflation, Scriven
said. So-called real interest rates are returns paid on savings in
excess of the inflation rate.

The
State Bank of Vietnam also said its discount rate will nearly double to
11 percent from 6 percent, while the refinance rate will be raised to
13 percent from 6 percent, according to the statement. The rates will
also take effect on May 19, it said.

`Weren't Suitable'

``The rates haven't been changed since February and were not suitable with the market situation,'' Nguyen Van Giau, the central bank governor, said in a news conference today in Hanoi.

The central bank
said on April 25 it didn't plan to increase its benchmark interest rate
because month-on-month inflation showed recent policy measures were
effective.

Vietnam's bank
lending rose 14.7 percent in the first four months, reaching almost
half the 30 percent limit set by the central bank to reduce credit
growth.

``Margins are
decreasing with banks borrowing short at high interest rates and
lending long, mostly at past lower rates,'' Vinacapital Investment
Management Ltd., the Ho Chi Minh City- based manager of three
U.K.-listed funds, said in a note this month posted on its Web site.

The
amount commercial banks must set aside as reserves was raised in
February to 11 percent for deposits of 12 months or less, from 10
percent. For dong and foreign currencies deposited for one year or
more, the figure rose to 5 percent from 4 percent.

`Rising Risks'

Standard
& Poor's Ratings Service this month cut its outlook on Vietnam's
credit rating to negative from stable, citing ``rising risks to
macroeconomic stability from an overheating economy.''

``Given
the unproven risk-management capability of domestic banks, an
unexpectedly severe slowdown in economic growth could see sharply
higher loan losses at many of these institutions,'' Standard &
Poor's said in a May 2 report.

Vietnam's Deputy Prime Minister Nguyen Sinh Hung
said last month the government would reduce the 2008 economic growth
target to 7 percent from a previous forecast of as much as 9 percent.

Gross
domestic product growth slowed to 7.4 percent year- on-year in the
first quarter. The economy expanded 8.5 percent in 2007, the fastest
rate since 1996.



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