The latest cuts in deposit and lending rates, begun on October 19, are expected to support businesses and the national economy. However, developments following a commitment to lower interest rates in April 2026 show that maintaining a low interest rate environment is not easy.

After a meeting with the State Bank of Vietnam (SBV) on April 9, banks agreed to cut deposit and lending rates from April 10. However, subsequent liquidity pressures put deposit rates under renewed upward pressure, showing that commitments to lower rates are difficult to sustain when market conditions are not favorable.

For the latest rate cuts to have a meaningful impact and remain sustainable, Dr. Nguyen Van Loc of Phenikaa University said the key lies not only in banks’ commitments but also in the economic conditions underpinning interest rates. 

He said administrative directives can secure consensus in the short term, but sustaining low rates also requires reducing the cost of capital, liquidity pressures and credit risks, while keeping inflation and exchange rate expectations stable.

“If these factors do not change, the rates that have just been cut will soon face renewed pressure to rise,” Loc warned.

If deposit rates fall while banks' demand for capital remains high, deposits may flow to other institutions or alternative investment channels. In response, banks would have to raise rates again to retain capital. A rate hike by one bank could force others to follow suit.

Meanwhile, lending rates depend not only on funding costs but also on operating expenses, risk provisioning, and the specific risk profile of each loan. If output interest rates drop without a corresponding reduction in these costs, banks may become more cautious during credit appraisals or prioritize clients with strong repayment capacity.

The end result could be lower listed interest rates, yet small and medium-sized enterprises (SMEs) would still struggle to access credit.

The SBV can utilize tools such as open market operations (OMO), refinancing, and key policy rates to influence liquidity conditions and short-term interest rates. However, effectiveness hinges on the root causes of liquidity shortages, intervention timing, and the overall state of the banking system.

This sentiment is shared by Le Ngoc Lam, Chair of the Board of Directors at BIDV. 

He said state-owned commercial banks are willing to sacrifice profits to support businesses. However, regarding joint-stock commercial banks, he noted they would feel more confident lowering input rates, and consequently lending rates, if the SBV sent strong signals, such as committing liquidity support during times of stress through channels like OMO or SWAP.

How to keep interest rates low and stable

According to Loc, if liquidity shortfalls are merely temporary, timely intervention can prevent banks from hiking deposit rates as a precautionary measure. However, if capital shortages persist due to overly rapid credit growth or maturity mismatches, banks must adjust their operations. Continuous short-term capital injections will not address the root causes.

Required reserve ratios can also serve as a tool impacting available funds and bank expenses. Nevertheless, this is a broad-impact instrument that must be weighed against overall inflation, exchange rates, and systemic safety; it should not be assumed that lowering reserve requirements will automatically sustain cheap credit.

“Crucially, a clear distinction must be made between temporary liquidity shortages and solvency issues. Banks with healthy assets experiencing short-term cash crunches should receive access to appropriate support mechanisms,” Loc emphasized.

To keep interest rate levels stable, the pace of credit growth must align with stable mobilization capacity, equity capital capacity, and banks' risk management capabilities.

From an accounting perspective, lending can create deposits within the banking system. However, individual banks must still meet payment and transfer obligations and comply with capital and liquidity requirements. When credit expands rapidly, particularly medium- and long-term lending, pressure to secure funding with suitable maturities can intensify.

Loc believes that credit growth targets and interest rate targets should be set within the same policy framework. If policymakers seek to accelerate lending sharply while also pushing for substantial interest rate cuts, without improvements in capital foundations and asset quality, the policies may create countervailing pressures.

Over the longer term, capital, liquidity and risk management standards need to play a greater role in regulating credit. This is also the direction of reform proposed by the International Monetary Fund (IMF) for Vietnam: modernizing the monetary policy framework and gradually moving away from credit growth ceilings toward an appropriate prudential supervision framework.

Tuan Nguyen