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Vietnam's central bank raises rates for first time since 2005 to fight inflation

Vietnam's central bank yesterday said it would raise benchmark interest rates for the first time since December 2005, battling double-digit inflation that has sparked popular anger and labor unrest.

Aiming to cool bank lending, the State Bank of Vietnam will tomorrow raise the base rate used by commercial banks to calculate loans from 8.25 percent to 8.75 percent, a statement on the bank's Web site said.

The State Bank of Vietnam will also raise the refinancing rate, at which the central bank lends to commercial banks, from 6.5 percent to 7.5 percent and the discount rate from 4.5 percent to 6.0 percent, the statement said.

"It's a step in the right direction," said Jonathan Pincus, the UN Development Program chief economist in Vietnam.

"Many economists have been saying we think the economy is overheating and that an interest rate move would be warranted to encourage savings and slow down the growth of credit, which many see as the main driver of inflation," he said.

The IMF last year urged Vietnam to limit credit growth and the government has set a goal of keeping annual inflation below GDP growth, which hit nearly 8.5 percent last year.

Spiralling food and consumer prices -- driven up by a cash influx amid Vietnam's rapid economic growth -- have hit the poor the hardest and fueled a surge in labor strikes demanding higher wages.

This month, the second month of double-digit inflation, thousands of workers have gone on strike at scores of foreign owned plants such as South Korean and Taiwanese textile and footwear factories near Ho Chi Minh City.

The General Statistics Office estimated that consumer prices rose 14.1 percent this month from a year earlier, driven up by food and construction material costs ahead of the Lunar New Year, or Tet.
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