The central bank said on Friday December 2 it had raised its key interest rates by between 0.45 and 0.5 of a percentage point to help it control inflation in coming months at a time when bird flu might push food prices higher.
The central bank’s base rate, used by commercial banks to set rates on their dong lending, was raised to 8.25% from 7.8%, a central bank official said.
“This is a normal adjustment of the central bank in line with keeping a flexible monetary policy and reflecting our role in controlling inflation during the first months of the upcoming year,” said the official, who declined to be identified.
The central bank also raised its re-discount rate to 6.5% from 6.0% and the discount rate to 4.5% from 4.0%. The new rates took effect on Thursday.
Bankers said demand for cash could rise in January prior to Tet, or the Lunar New Year festival, at the end of that month as companies pay end of the year bonuses and clear debts.
The authorities are also concerned about the impact of bird flu on food prices, which account for nearly half of the basket used to calculate Vietnam’s consumer price index.
The index was estimated to have risen 8.5% in November from a year earlier and the government has forecast annual inflation of around 8% for end-2005, above its initial target of keeping it below 6.5%.
Bird flu outbreaks have been spreading in Vietnam, especially in the north where the winter ending in January has just entered its second month and temperatures are expected to drop further by the end of this month. The poultry virus thrives best in cooler temperatures.
The agriculture ministry said 1.9 million birds had been killed or slaughtered in Vietnam since October when bird flu returned. That has cut supplies of poultry meat and eggs while making beef, pork and seafood more expensive.
The official rate rises had only a slight impact in the money market.
Four state-run banks, the country’s key lenders, quoted overnight dong loans at 6.5-6.7%, which was up marginally from 6.5-6.6% on Monday but similar to the range seen last week.
The central bank uses the discount rate in buying back short-term paper from commercial banks, while the re-discount rate is what it uses to lend to commercial banks.
This is the third time the central bank has raised its discount and rediscount rates this year, after similar moves in January and March.
The higher rates mean commercial banks should be more active in seeking funds from depositors instead of relying on the central bank.
It last raised the base rate on dong loans in January.
This week the National Assembly approved a government proposal to set a flexible inflation target for next year. Consumer prices should rise at a rate below the economic growth rate, which has been forecast at 8% this year, the assembly said in a resolution on Tuesday.