- 11 Jun 2012
- The Wall Street Journal Asia
- BY VU TRONG KHANH AND PATRICK BARTA
HANOI—Vietnam’s decision to cut interest rates for the fourth time this year marks policy makers’ latest effort to revive an economy that once was among Asia’s fastestgrowing.
The State Bank of Vietnam said Friday it will cut its policy rates by one percentage point on Monday, dropping the refinancing rate to 11%, the discount rate to 9% and the overnight rate for interbank electronic payments to 12%.
The central bank has already cut rates by a cumulative three percentage points this year, freed up by authorities’ success in reining in inflation, which eased last month to 8.3%—its slowest pace since August 2010. Last year inflation soared above 20%.
But the aggressive rate-cutting also indicates that Vietnam’s economy remains weak and needs additional stimulus to get back on track, economists said. First-quarter growth was the worst in three years, with gross domestic product up only 4% from a year earlier, slowing from 6.1% in the previous quarter and an average of 7.7% from 2003 to 2008. Weak data so far in the current quarter suggest the GDP is unlikely to pick up much if at all, analysts said.
“Lower interest rates are… needed to boost the economy,” wrote analysts at Capital Economics in a note to clients. But they also warned that policy makers face a delicate balancing act: Rate cuts in the aftermath of the 2008-09 global financial crisis contributed to the run-up in inflation over the past two years.
“Overly aggressive loosening could damage the central bank’s credibility,” Capital Economics said.
Vietnam’s economy suffers from an entrenched trade deficit and low confidence in the currency, the dong, which has forced the government to devalue it several times. The country also faces problems with nonperforming loans at some financial institutions and asset bubbles that emerged when rates were slashed a few years ago, analysts say.
To help cope with those problems, the government last year pledged a range of policies aimed at controlling credit growth, boosting domestic production and curbing the trade deficit. The central bank also raised benchmark interest rates, which helped to control inflation but also slowed the economy.
