The central bank unexpectedly increased the base rate to 8 percent last month amid signs of quickening inflation, after holding it at 7 percent for 10 months to revive the economy. The government also subsidized corporate borrowing and reduced tax payments to boost gross domestic product.

“The central bank may want to keep rates unchanged because it doesn’t want to add to costs for companies, especially because the loan subsidy program has been pared back,” said Duong Thu Huong, Hanoi-based general secretary of the Vietnam Banks Association and a former deputy governor of the central bank.

The government is trying to find a balance between boosting economic growth and easing inflation, Prime Minister Nguyen Tan Dung told bankers at a conference Dec. 23.

The economy expanded 3.1 percent in the first quarter, the slowest pace on record, before growth quickened to 4.5 percent in the second quarter and 5.8 percent in the next three months. The Hanoi-based General Statistics Office will probably release December GDP figures next week.

The government is under pressure to raise rates again to cool inflation. The consumer price index rose 6.5 percent in December, the fastest pace since April.

Inflation dangers

Annual inflation may accelerate to 14.2 percent by the third quarter, Nomura Holdings Inc. predicted in a report released last week.

In addition to raising rates last month, the central bank also allowed the dong to depreciate 5 percent by setting a weaker reference rate for the currency. A widening trade deficit had fueled concerns the currency will weaken as demand for dollars and gold increased.

Higher interest rates are needed because of “increased vulnerabilities, partly coming from the foreign-exchange situation,” the ADB’s Konishi said.

Vietnam aims to limit inflation to 7 percent next year, and for GDP to expand 6.5 percent, the government said in a report released on Dec. 3 at a meeting in Hanoi with international organizations.

Vietnam will “transfer from a loose monetary policy to a cautious, flexible policy,” the report said.

Source: Bloomberg