Vietnam’s central bank has announced plans to cut interest rates by one percentage point, signalling the government’s confidence that it is winning the battle against inflation and its desire to help struggling banks and businesses.

Nguyen Van Binh, the governor of the State Bank of Vietnam, the central bank, said at a press conference on Tuesday that he would decrease benchmark interest rates and the cap on deposit interest by one percentage point in the “next few days”, ending a long tightening cycle.

Economists said they had been expecting the move but they warned that if the government eased monetary policy too quickly without addressing structural problems, it would merely stoke another painful inflation cycle.

With Vietnam’s banks struggling under the weight of mounting bad debts and companies hamstrung by bank lending rates of well over 20 per cent a year, the Communist government has come under renewed pressure to reduce interest rates.

The central bank raised rates by as much as 6 percentage points last year in a belated effort to rein in Asia’s highest inflation rate, the result of rapid credit growth and inefficient investment by state-owned companies.

But, with annual inflation having fallen from the peak of 23 per cent in August to 16 per cent last month, Mr Binh said that now was the right time to reduce borrowing costs in order to “meet the needs of economic growth” while also achieving the government’s target of single-digit inflation for this year.

The refinancing rate, a key interbank lending rate, will be lowered from 15 per cent to 14 per cent, while the cap on deposit interest will be cut from 14 per cent to 13 per cent.

Tai Hui, an economist at Standard Chartered in Singapore, predicted that the refinancing rate would be reduced to 11 per cent by the end of the year.

Gareth Leather, an economist at Capital Economics, a research house based in London, said that further rate cuts were “only a matter of time” but warned the government against easing policy too rapidly.

“How quickly the central bank loosens policy this time will provide an important test of its commitment to macro-stability over short-term growth,” he wrote in a note to clients. “There is a risk the State Bank of Vietnam will cut more aggressively than we currently expect.”

Days after the government released its road map for banking sector reform, Mr Binh also revealed that the central bank has put nine weak banks under “tight control” and was working to restructure them.

He said that these nine banks accounted for only 6 per cent of total market share so their problems should not affect the rest of the banking system.

Additional reporting by Nguyen Phuong Linh

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