Việt Nam struggles to keep interest rates low amid funding, inflation pressures

Việt Nam struggles to keep interest rates low amid funding, inflation pressures

Việt Nam’s efforts to lower borrowing costs are facing growing pressure from strong demand for credit, rising deposit rates, inflation and currency-market uncertainty, complicating the Government’s goal of sustaining economic growth of 10 per cent or more.

Bundles of Vietnamese đồng banknotes are counted at a bank in Việt Nam amid pressure on lenders to lower deposit and lendingrates as credit demand, funding costs and inflation risks rise. — VNS Photo Bồ Xuân Hiệp

Việt Nam’s efforts to lower borrowing costs are facing growing pressure from strong credit demand, rising deposit rates, inflation and currency-market uncertainty, complicating the Government’s goal of achieving economic growth of 10 per cent or more.

The State Bank of Vietnam (SBV) recently ordered commercial banks to cut listed annual deposit rates by at least 0.5 percentage points for terms of six months or longer and reduce lending rates by 1.5-2 percentage points on loans for production, business activities and priority sectors.

At a meeting with representatives of 46 commercial banks on Monday, Phạm Đức Ấn, governor of the SBV, urged lenders to reduce operating and funding costs and accept lower profit margins to support borrowers. Rate cuts should apply to both existing and new loans, with support focused on businesses and priority sectors.

The SBV also warned that banks failing to comply could face cuts to their remaining credit growth quotas for 2026, lower targets for 2027 or tighter prudential requirements.

The move highlights a difficult policy dilemma: banks are being asked to make loans cheaper while competing for the funds needed to finance a rapidly expanding economy.

Credit growth reached 11.44 per cent as of October 14, outpacing deposit mobilisation growth of 11.22 per cent, according to figures cited by the governor.

The gap between outstanding đồng-denominated loans and deposits has narrowed from nearly VNĐ2 quadrillion to below VNĐ1.5 quadrillion, he said.

Funding costs limit rate cuts

Competition for deposits has intensified as banks seek to meet rising demand for loans. Some lenders have offered annual deposit rates of 9-9.5 per cent for longer terms, with promotional rates reaching 10 per cent under certain conditions.

Higher rates benefit savers but increase banks’ funding costs, leaving them less room to cut lending rates without squeezing profit margins.

SBV data show that the average interest rate on newly mobilised deposits reached 6.38 per cent a year on September 20, up 1.15 percentage points from the end of 2025.

The average lending rate rose to 10.7 per cent in August, nearly two percentage points above its level at the end of last year.

VNDirect Securities expected deposit rates to remain broadly stable through the end of 2026, with limited room for further declines. Analysts cited inflation, strong demand for capital and uncertainty over US monetary policy.

The latest directive aims to curb competition for deposits, but administrative pressure alone may not resolve the mismatch between credit demand and available funding.

Cutting deposit rates too quickly could make it harder for banks to retain customers, while reducing lending rates without lower funding costs could weaken profitability.

Inflation and currency risks

Inflation and exchange-rate pressures further limit the central bank’s options.

Consumer prices rose by an average of 4.45 per cent year on year in the first eight months of 2026, while core inflation increased by 4.24 per cent, according to the National Statistics Office. Both figures leave inflation close to the Government’s 4.5 per cent target.

A weaker đồng could make imported fuel, machinery and raw materials more expensive, adding to production costs. It could also increase debt-servicing costs for businesses with foreign-currency liabilities.

The gap between Vietnamese and US interest rates is another consideration. If US rates remain high or rise further, keeping domestic rates too low could add pressure on the đồng and make dollar-denominated assets more attractive.

Suan Teck Kin, head of global economics and markets research at UOB, discussed the challenges facing Việt Nam amid global monetary uncertainty in September.

Economist Cấn Văn Lực and researchers at BIDV have also highlighted the difficulties higher foreign-currency interest rates could pose for domestic monetary policy.

The SBV must balance economic growth, inflation, currency stability and liquidity. Lower borrowing costs can help businesses invest and expand, but excessive easing could add to price pressures or weaken confidence in the đồng.

Credit demand adds to pressure

Việt Nam’s reliance on bank lending makes the challenge more difficult. Businesses need capital to expand, while plans to accelerate public investment and develop major transport, energy and industrial projects will add to financing demand.

Unlike economies with deeper capital markets, Việt Nam relies heavily on banks to channel savings into investment. If credit grows faster than deposits, lenders may have to offer higher rates to secure funding.

KBSV Securities has forecast that deposit rates could rise by 0.7-1.2 percentage points from 2025 levels as banks respond to strong credit demand and liquidity risks.

The SBV has also sought to ease funding constraints through regulatory changes affecting banks’ loan-to-deposit ratios and the use of short-term funds for medium- and long-term lending. The impact will depend on deposit growth and wider liquidity conditions.

At the same time, the central bank has told lenders to maintain credit quality, accurately report non-performing loans, assess collateral at market prices and avoid relaxing lending standards to expand their loan books.

Fiscal policy can help

Economists argue that monetary policy alone cannot deliver the low borrowing costs needed to sustain rapid growth.

Suan Teck Kin has pointed to faster public investment disbursement, administrative reforms and more efficient use of capital as ways to support economic activity without relying excessively on credit expansion.

Developing corporate bond markets and other long-term funding channels could also reduce businesses’ dependence on bank loans, allowing lenders to manage their balance sheets more effectively.

For now, the SBV faces a difficult balancing act. Its latest directive signals a clear push to lower borrowing costs, but sustained rate cuts will depend on whether deposit growth catches up with lending demand, external pressures ease and inflation remains under control. 

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