Vietnam raises prime rate

May 19, 2008, 11:06 GMT

Hanoi - Vietnam's State Bank raised its prime interest rate from 8.75 to 12 per cent effective Monday and eased caps on the interest rates which private banks are allowed to offer depositors, adjusting the country's interest rates to cope with inflation, which hit 21 per cent in April year-on-year.

Private banks may now offer interest rates of up to 150 per cent of the prime rate, or 18 per cent at the moment, and the rate will move in tandem with changes in the prime rate.

The State Bank last raised the prime rate on February 1 after having left it unchanged for three years.

Vietnamese bankers welcomed the move, but not all immediately moved to raise interest rates.

'We have adjusted the rates of some products, some terms,' said Nguyen Duc Vinh, director general of Techcombank. 'But the adjustment is not significant, only to make it suitable with the trends of other banks.'

Vinh said Techcombank was offering interest rates of between 13.5 and 13.9 per cent.

International economic advisors such as the International Monetary Fund have been urging Vietnam to fight inflation by loosening the exchange rate of the Vietnamese dong, which is closely pegged to the dollar, and by restricting credit by measures such as raising interest rates on loans.

Economists have expressed concern that interest rates lower than the inflation rate encourage businesses to take out loans, expanding the supply of credit. Vinh said it would be difficult to raise interest rates to equal the inflation rate.

'When the economy is suffering from inflation, hardly can anyone get positive interest rates, because the whole market and the whole economy are affected,' Vinh said. 'I think the state will have basic interest rate adjustment so that it is appropriate with the demand-supply relation of the market interest rates.'