The central bank is likely to hike interest rates in the coming months since the government is determined to curb inflation and limit the devaluation of the dong, according to the Hong Kong-Shanghai Banking Corp.

The key rate may rise by 4 percent to 11 percent by the end of this year, the bank said in a report Tuesday.

The interest rate hike, likely to be the biggest in Asia, is a result of the widening trade deficit, accelerated inflation, and a perennially weak currency.

Expectations of a devaluation have caused much pressure on the local currency in recent weeks.

Capital flows into Vietnam have slowed down compared to neighboring countries since foreign investors’ confidence in Vietnam is not high.

Since the beginning of this year, growth has been the main focus, but the latest decision reveals a more balanced policy that seeks to prevent the weakening of the currency and fight inflation.

Raising the base rate will not have an immediate influence on the exchange rate or money market because the free market exchange rate remains higher than the official rate. But the decision to raise rates has signaled that policy makers are addressing the anxiety.

The economy grew at 5.8 percent in the third quarter, up from 4.5 percent in the second quarter, driven in part by a government stimulus package that included an interest-rate subsidy program. Inflation accelerated in September for the first time in more than a year.

“Vietnam stands out as having administered by far the most in the way of policy medicine to tackle the slowdown.

“With credit growth having already surged in the country and the trade deficit moving sharply higher again, the risk is that too much has been done and some of the measures will need to be taken back relatively quickly.”

Vietnam’s policy makers have reversed their economic policy directions as the government allowed the State Bank of Vietnam to raise base rates and restart the process to tighten monetary policy.

The government is committed to resolving economic challenges but that may take some time.

On November 5 the central bank hiked the benchmark rate from 8 percent to 9 percent, marking the first base rate increase since December 2009.

Its discount and refinancing rates were also pushed up by 1 percent to 7 percent and 9 percent respectively.

A day earlier the government had promised not to devalue the dong before Lunar New Year, or Tet, next February.

But the State Bank of Vietnam, the Vietnam central bank, announced Thursday it will pump more capital via open market operations in the next 14 days to ensure bank lending interest rates do not exceed the 20 percent per annum threshold.

Source: tuoitrenews