HANOI (AFP) — Vietnam's central bank on Tuesday said it would raise interest rates and marginally devalue the dong currency in a bid to tackle double-digit inflation and stabilise the economy.
The State Bank of Vietnam said it would raise the base interest rate to 14 from 12 percent, effective from Wednesday, as part of "tightening monetary policy to curb inflation and stabilise the macroeconomy."
The central bank also said in an online statement announcing the year's third rate rise that it would increase the refinancing rate to 15 from 13 percent and the discount rate to 13 from 11 percent.
"They're inching toward a tighter monetary stance and taking it in stages to gauge the impact of each move as they do it, which is not a bad way to approach it," said UN Development Programme Vietnam chief economist Jonathan Pincus.
"This will draw more saving into the banking system to strengthen the dong."
On the exchange rate, the central bank said it would lower the dong against the dollar by about two percent "to better reflect the situation of supply and demand of forex ... and counter the hoarding of foreign currencies."
The State Bank said the dollar interbank rate would be raised from 16,139 to 16,461 dong Wednesday, a move that Pincus said aimed to boost confidence in the dong by narrowing the gap between the official and the informal rate.
The dong is allowed to trade one percent above or below the bank's day rate.
However, last week it briefly traded at up to 18,500 to the dollar in gold shops as some Vietnamese investors bought up greenbacks, which they regarded as more stable stores of value in times of rapidly rising prices.
Inflation hit 25 percent year-on-year in May, and the trade deficit, fuelled by a surge of imports, widened to 14.4 billion dollars in the first five months, according to data from the communist government.
Vietnam has made tackling inflation -- driven by surging global energy and food prices and high capital inflows -- a top priority while cutting the 2008 economic growth target to 7.0 percent from last year's 8.5 percent.
Vietnam has said it targets growth of 7 to 7.5 percent for 2009.
Several credit rating agencies have in recent weeks lowered their outlook for Vietnam and criticised the government's slow response to inflation, which has especially hurt the country's poor and sparked labour strikes.
Deutsche Bank has predicted a looming currency devaluation and said the economy may soon require an IMF-style programme.
The International Monetary Fund (IMF) last week suggested Vietnam tighten monetary and fiscal policy to fix its "overheating" economy.
IMF country chief Ben Bingham said the central bank should raise interest rates "to provide adequate returns to savers and bring credit growth and inflation under control."
Bingham also said the IMF believed that "greater exchange rate flexibility would simplify monetary management and help the central bank better manage shifts in capital flows more effectively."
The IMF country chief told AFP that the fund is not currently working on an assistance package for the country.
Prime Minister Nguyen Tan Dung last week told JP Morgan chief economist David Fernandez that Vietnam will be able to tackle its difficulties and continue its sustainable development, state media reported.
Dung pledged that "with the foreign currency surplus, the government will be able to intervene to maintain the dong's value and ensure imports."
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