Vietnam’s central bank on Tuesday announced another cut in the compulsory reserve requirment for dong deposits to free up cash in the banking system as the government reported the lowest inflation in more than a year.
Interest rates were held steady, with the State Bank of Vietnam keeping the benchmark base rate at 7%. The new reserve requirement ratio for dong currency deposits of 3%, down from 5%, would take effect on March 1.
“The purpose is to stabilise the monetary market, exchange rates and support to raise usable funds at banks,” the central bank said in a statement.
The foreign currency reserves ratio stayed unchanged at 7%, the central bank said.
Rate cuts and reserve ratio adjustments have gone in tandem for most of Vietnam’s monetary unwinding in recent months, which has seen interest rates halved since June last year.
The bank had cranked up rates to battle soaring inflation which, coupled with a widening trade deficit, pushed Vietnam’s economy to the brink of a meltdown last year.
But prices have eased, as February’s data showed.
The consumer price index rose an estimated 14.78% in February from a year ago, the lowest annual rise since January 2008, while food prices rose 35.29% from last February. Average inflation rate for the first two months of this year was 16.13%.
The central bank, which last cut the base rate by 150 basis points on February 1, has hinted that it had planned to cut interest rates further this year to spur borrowing and boost economic growth in the face of the global recession.
Some economists, however, question the value of further rate cuts, given banks’ unwillingness to lend and businesses’ lack of appetite for new debt in the current environment.
Dong interest rates have risen slightly this week because banks need more funds to lend under a government-directed economic stimulus package.
Rates on overnight loans rose to 6.63% on Monday from 5.03% at the beginning of this month, Reuters data showed.
Vietnam’s economic growth slowed last year to its weakest pace in almost a decade of just 6.23% after being hit first by soaring prices and then the global financial crisis.
The government is handing out about US$1 billion in corporate tax relief and has said it would subsidise 4% of interest payments on loans to the tune of about US$1 billion.
The central bank, for its part, has been trying to spur economic activity through a series of interest rate cuts and other measures to boost lending.
This week the central bank also said it had asked banks to expand credit, provide funding guarantees for small-and medium-sized enterprises and carry out the government’s interest rate subsidy plan.