Overnight money fell sharply to 8.56 percent from 10.29 percent at the start of last week, and rates on two-month loans fell to 11.44 percent from 11.59 percent, Reuters data showed.

Rates on three-month loans, however, rose 12 basis points to 11.79 percent in the week ending Monday, and the 12-month rate jumped to 12 percent from 11.89 percent.

Bankers said liquidity has improved, with short-term rates easing as a sign, after the central bank pumped at least VND15 trillion into banks last week via open market operations, a local newspaper said.

Banks could sell the dollar they bought from major state firms to boost dong funds, an executive at state-run lender BIDV said. Last month the government ordered seven corporations to sell dollars to banks to help ease a dollar shortage.

"In return, a sizeable amount of Vietnamese dong will be on the way back to the banking system," BIDV Treasury Department's deputy head Vo Thi Sanh was quoted in the Monday edition of the Vietnam Investment Review weekly as saying.

But in longer term, demand for dong funds remained strong as Vietnam seeks to accelerate growth in the US$89 billion economy to 6.5 percent this year from 5.3 percent in 2009.

Lending is expected to remain tight in the first quarter as banks want to save funds for later, with demand expected to rise from the third quarter, said Nguyen Thanh Hung, deputy head of Sacombank Securities.

The State Bank of Vietnam, the central bank, has said it wants to reduce annual credit growth this year to around 25 percent from 38 percent in 2009 to keep inflation under control.

The central bank raised the base rate on dong loans by 1 percentage point to 8 percent in December and kept it unchanged for January.

The central bank should abolish the base rate and more actively use the discount and refinancing rates as market intervention tools, Vietnam Banks Association General Secretary Duong Thu Huong wrote in an article published on Monday.

The discount rate stands now at 6 percent and the refinancing rate is 8 percent.

Nguyen Ngoc Bao, head of the central bank's Monetary Policy Department, said in a separate interview that the central bank would pursue "a flexible adjustment of the base rate, the refinancing and the discount rates" this year.

The central bank will also use compulsory reserves and refinancing to meet the money supply target, Bao was quoted by the Finance Ministry-run Vietnam Financial Times newspaper as saying.

Source: Reuters