Vietnam to relax policy, stop draining cash

Viet Nam 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 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% 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% 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% 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% from June 2007 but they were 2.14% higher than in May, slowing from a monthly rise of 3.9% in May and 2.2% 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 (VND) which the central bank has allowed to weaken 2.4% so far against the dollar.

The central bank has doubled the trading band to +/- 2% of the official dollar/dong rate set daily for interbank market deals, allowing more room for banks to trade in the currencies. (Reuters)