Vietnam raises interest rate in fight against inflation

Image caption,
The dong has been under pressure despite Vietnam's rapid pace of economic growth

Vietnam has raised its main interest rate by two percentage points, but the country is still facing a tough fight to control inflation, analysts say.

The central bank raised its main cost of borrowing by 200 basis points to 11% from 9% on Thursday.

Last week, Vietnam had devalued its currency, the dong, by 8.5%, a move analysts said would fuel inflationary pressures.

Annual rate of inflation rose to 12.2% in January, almost a two-year high.

Analysts said the rate rise could help support the currency and curb inflation.

"The hike is essential, especially after the devaluation of the dong last week," ANZ Bank said.

ANZ added that the interest rate increase on its own would not slow inflation enough for the State Bank of Vietnam to achieve its inflation target of 7% by the end of the 2011.

"Therefore, we expect the authorities will have to raise rates again this year," it concluded.

Sacrifice Growth?

However, there are concerns that continued interest rate increases may start to affect Vietnam's economic growth.

Some analysts estimate that the country will have to reduce its economic growth target to between 5% and 6% this year.

That is well below the 7% to 7.5% growth rate the government had earlier forecast.

All three major ratings agencies downgraded Vietnam's credit rating last year because of economic concerns.

They cited currency and inflation problems, as well as worries about the country's trade, budget and current account deficits.

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