VINACHEM

Vietnam will cut a key policy rate to spur lending by banks as the government steps up measures to bolster a struggling economy.

The State Bank of Vietnam’s dong deposit rate cap for terms between one month to less than six months will be lowered to 5.5 percent from 6 percent with effect from tomorrow, deputy head of monetary policy Nguyen Thu Ha said in Hanoi today. The refinance, discount and repurchase rates will remain unchanged.

Vietnam’s policy makers are trying to prop up an economy that the World Bank estimates will expand 5.4 percent this year, slower than a government target of 5.8 percent. The monetary authority has asked commercial lenders to lower their rates in order to reach a credit growth target of 12 percent to 14 percent, Deputy Governor Nguyen Thi Hong said today.

“The repercussions or consequences of this are much more limited than you might expect,” said Fiachra MacCana, managing director of Ho Chi Minh City Securities. “No doubt, they would hope to encourage banks to reciprocate on the lending side,” even as the cut would have a limited effect on the economy, he said.

The dong was little changed at 21,280 against the U.S. dollar as of 3:42 p.m. local time. The benchmark stock index gained 0.4 percent at the close.

Vietnam has increased efforts to overhaul banks struggling with among the highest levels of bad debt in Southeast Asia. The government is also trying to accelerate privatization of state enterprises, and plans to set up a working group to boost share sales.

Bank lending growth was at 7.85 percent as of Oct. 24 from the end of 2013, the central bank said today. The bad-debt ratio was 3.88 percent as of end-September, and the state asset management company has sold 3.5 trillion dong ($164 million) of bad debt as of now, Chairman Nguyen Quoc Hung said.

The central bank will closely watch the market “to ensure stability of the money market and dong exchange rates,” Ha said. It will also “flexibly” manage open-market-operation activities to ensure sufficient money supply, she said.

Consumer prices rose 3.23 percent in October from a year earlier, data showed last week, the slowest pace since 2009. The central bank cut its policy rates in March and devalued the dong in June this year. It will keep its policy rates unchanged till the end of the year, Hong said.

The central bank’s actions are in contrast to recent policy tightening moves by central banks in the Philippines and Malaysia. Vietnam’s gross domestic product rose 5.62 percent in the nine months through September from the same period a year earlier, data showed last month.

Some analysts have questioned Vietnam’s third-quarter data and the government’s confidence in meeting its target this year. Economists Glenn Maguire and Eugenia Fabon Victorino at Australia & New Zealand Banking Group Ltd. wrote in a report this month that they are “skeptical of the strong growth print, as most economic indicators are pointing to weaker growth data” compared to the same period last year.