Refinancing Rate by SBV Makes Sense: ANZ

The announcement of raising its refinancing rate by 100bps by the State Bank of Vietnam dated October 09, 2011 is an unexpected move according to ANZ Bank. The move aims at ensuring a reasonable relationship between the policy rate and the SBV’s role as lender of last resort to increase the effectiveness of monetary policies.

According to ANZ Bank, the rate move increases the cost of borrowing from the SBV and will drag money and credit growth down further. The SBV targets broad money (M2) and credit growth at 12 percent and 15-17 percent this year. Meanwhile, the cut on rates for dollar deposits will make the dong relatively more attractive and help ease some recent pressures on the local currency.

ANZ bank says that the move makes sense: inflation has peaked, but will remain in double-digits well into 2012. Meanwhile, growth has moderated, but remains strong and, in general, has not been impacted by the ongoing global crisis due to weak financial linkages with the North Atlantic and limited portfolio investment. Thus, inflation is the biggest policy challenge for the country, not growth.