IMF Says Vietnam Interest-Rate Cut May ‘Confuse the Market

IMF Says Vietnam Interest-Rate Cut May ‘Confuse the Market

’Posted: July 13, 2011

VietFinanceNews.com – The Vietnamese central bank’s decision to cut its repurchase rate last week may call into question the government’s determination to fight inflation, the International Monetary Fund said.

The State Bank of Vietnam lowered the repo rate for the seven-day term on July 4 to 14 percent from 15 percent. The central bank had boosted it from 7 percent at the start of November 2010. The rate appears to have become the benchmark for monetary policy, according to JPMorgan Chase & Co.

“We are a bit concerned that the cut in rates will confuse the market about the government’s commitment to sustaining the stabilization effort under Resolution 11,” Benedict Bingham, the IMF’s senior resident representative in Vietnam, said in an e-mail today in response to a question from Bloomberg News.

“A strong commitment to sustaining this effort is essential to re-establishing confidence in the dong and restoring macro-economic stability more generally,” Bingham said.

The government approved a resolution in February to tackle inflation by restraining lending growth and curbing the budget deficit, and the IMF said last month the government should send a “strong signal” that it will carry it through into 2012. Vietnamese inflation accelerated in June to 20.82 percent, the fastest pace since 2008 and the highest level in Asia.

Consumer-price growth next year will be higher than previously estimated because of the repurchase rate cut, Credit Suisse Group AG said in a note on July 8. The move potentially sends a “confusing signal” to investors, it said.

Ratings Risk

The central bank’s “inability to stay the course” with coherent policies is credit-negative and may hurt the Vietnamese dong, Moody’s Investors Service said in a note yesterday. The dong was devalued for the fourth time in 15 months on Feb. 11.

“This rate cut’s timing was particularly surprising given government and central bank officials’ recent pronouncements about their commitment to fight inflation,” wrote Christian de Guzman, a Singapore-based assistant vice president at Moody’s. “No statement detailing the rationale behind the rate cut was available, underscoring the State Bank of Vietnam’s poor communication with the market.”

The central bank said in a statement posted on its website on July 8 that the rate cut was “not a policy signal” and that it would continue with a tight and cautious monetary policy.

Fitch Ratings, Moody’s and Standard & Poor’s cut Vietnam’s sovereign-debt rating in 2010 deeper into so-called junk status. (Bloomberg)

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