Vietnam cuts key rate for second time in weeks to aid economy

HANOI, April 4 (Bloomberg): Vietnam’s central bank announced it will cut a key policy interest rate for the second time this year as it seeks to bolster an economy that grew slower than expected amid drops in exports and slowing domestic demand.

The State Bank of Vietnam will reduce its refinancing rate to 5.5% from 6%, effective April 3, the regulator announced on its website Friday night. A reduction in the refinancing rate will help banks get cheaper loans from the central bank, which in turn can lower their lending interest rates to businesses.

The central bank said it decided to cut the rate "amid continued global economic uncertainties that led to the nation’s slowing economic growth in the first quarter while inflation is under control and banks have a surplus of liquidity,” according to the website statement.

Conditions for more policy rate cuts "are favorable,” Pham Chi Quang, head of monetary policy at the State Bank, said in a Hanoi briefing earlier Friday, citing inflation that will meet this year’s 4.5% goal while credit growth is sluggish.

The central bank’s discount rate will remain unchanged at 3.5%, according to the website statement.

The dong deposit rate cap for terms between one month and less than six months will be lowered to 5.5% from 6% while the cap on the lending interest rates for short-term loans in some sectors will be reduced to 4.5% from 5%, it said.

"This is a bit of a surprise,” said Ruchir Desai, co-fund manager of the AFC Asia Frontier Fund. "It reflects that SBV is quite concerned on the economic growth outlook for this year, especially after weak GDP growth in the first quarter,” said Ruchir Desai, co-fund manager of the AFC Asia Frontier Fund.

The rate cuts came after the central bank continued to urge lenders to lower commercial lending interest rates to support businesses, according to the statement.

The monetary regulator on March 15 cut its discount rate by 100 basis points while keeping the benchmark refinancing rate unchanged.

The reduction in the discount rate will help bring down the cost of funds for banks, according to Nguyen Quoc Hung, general secretary of Vietnam’s Bank Association.

Banks can now borrow from the central bank at a lower rate, allowing them reduce their lending interest rates to businesses, said Hung, who was formerly head of the credit department at the central bank. - Reuters