Wednesday, July 16, 2008

Vietnam to relax policy, stop draining cash

Tue Jul 15, 2008 8:54am IST

HANOI, July 15 (Reuters) - Vietnam will relax its monetary policy by stopping the draining of cash from the economy and allowing more lending targeted at specific projects, a state-run newspaper said on Tuesday citing the central bank governor.

The Saigon Giai Phong (Liberation Saigon) daily also quoted governor Nguyen Van Giau as saying that the central bank would consider cutting its base rate, used by commercial banks to set their lending and deposit rates.

Lending could further expand but "the growth should aim at specific targets, not for every project", the paper quoted Giau as saying.

Vietnam's central bank has raised interest rates three times this year as it aims to cap the country's credit growth at 30 percent in 2008 to help contain double-digit inflation.

The central bank has drained 17 trillion dong ($1.03 billion) from the economy in the first half of 2008, causing the value of cash in circulation at the end of June to drop 7.13 percent from the end of 2007, the paper cited central bank figures as saying.

The monetary tightening measures have brought in some results, with the monthly rise of consumer prices starting to slow, while the annual economic growth has also slowed to 6.5 percent in the first half of the year.

Last month a central bank official said rate cuts might take place in August to support businesses, given an expected slowdown in inflation.

Consumer prices last month jumped 26.8 percent from June 2007 but they were 2.14 percent higher than in May, slowing from a monthly rise of 3.9 percent in May and 2.2 percent in April. Governor Giau also said that the central bank would further maintain its flexibility in regulating the dong exchange rate to benefit both exporters and importers.

A tripling trade deficit this year has pressured on the Vietnamese dong which the central bank has allowed to weaken 2.4 percent so far against the dollar.

The central bank has doubled the trading band to +/- 2 percent of the official dollar/dong rate set daily for interbank market deals, allowing more room for banks to trade in the currencies. ($1=16,509 dong) (Reporting by Ho Binh Minh; Editing by Tomasz Janowski)