The government’s overarching goal is clear: lower input costs to drive down output costs, thereby stimulating GDP growth. However, while lower interest rates may offer immediate benefits, they also raise concerns about long-term financial stability, particularly in the banking sector, which is already facing challenges in capital mobilization.
The Ban on Interest Rate Increases
At the beginning of 2024, deposit interest rates continued their downward trajectory from 2023, reaching historic lows—even lower than the rock-bottom rates seen during the COVID-19 pandemic. However, in April 2024, interest rates at various banks reversed course and began to climb, with smaller banks leading the charge before the trend spread to larger institutions. By January 2025, twelve banks had raised their interest rates by 0.1% to 0.9% per year. This upward momentum continued into February, with six additional banks following suit.
However, this trend came to an abrupt halt when the Prime Minister intervened. On February 24, he issued Official Dispatch No. 19/CD-TTg, instructing the SBV to reinforce measures aimed at reducing interest rates. The directive emphasized the importance of lower lending rates in alleviating financial pressures on businesses and consumers, thereby fostering economic growth.
Responding swiftly, the SBV convened an emergency online meeting on February 25 with credit institutions to discuss interest rate stabilization strategies. Bank leaders pledged to adhere to government directives by refraining from increasing lending interest rates, even as they faced mounting internal pressures.
The government’s stance was further reinforced on March 1 through Directive No. 05/CT-TTg, which outlined key economic priorities for 2025. Among these was a renewed call for the SBV to closely monitor interest rate movements and lending practices across commercial banks to ensure alignment with national economic growth targets, including an ambitious goal of exceeding 8% GDP growth for the year.
A Policy Against the Tide?
For borrowers, lower interest rates are welcome news. They reduce the cost of capital for businesses looking to expand and for consumers making large purchases. However, the critical question remains: Is an aggressive interest rate reduction a silver bullet for economic stimulation, or will it introduce new financial risks?
Commercial banks argue that interest rates are predominantly short-term, which necessitates periodic adjustments to maintain balance in capital structures. Many banks had raised interest rates for medium- to long-term deposits while simultaneously lowering rates for short-term deposits. Additionally, external market pressures—such as fluctuations in gold prices and exchange rates—compelled banks to recalibrate their interest rate portfolios.
In compliance with government directives, numerous commercial banks promptly announced revised interest rate schedules, lowering rates to levels below their prior peaks. However, a closer examination of banks’ financial reports reveals a concerning trend: sustained low interest rates could significantly hinder their ability to attract capital for re-lending.
A recently published report highlighted the widening gap between lending and deposit mobilization. As of December 31, 2024, total outstanding loans across 27 publicly listed banks in Vietnam had surged to more than VND 11,850 trillion, marking an 18% year-over-year increase. Meanwhile, total customer deposits at these institutions stood at nearly VND 11,140 trillion, reflecting a comparatively modest 13% rise. Among these 27 banks, 20 had higher loan-to-deposit ratios (LDR) than at the end of 2023, indicating that their lending activities had outpaced their capacity to raise new deposits.
A recent bulletin from the Vietnam Banking Association corroborated these findings, revealing a persistent upward trend in LDR ratios. This shift underscores the growing reliance on credit expansion, which, if left unchecked, could exacerbate liquidity challenges. Experts warn that smaller banks, in particular, face heightened liquidity risks due to their dependence on short-term funding sources and relatively weak liquidity buffers.
The banking system’s liquidity constraints are becoming increasingly apparent. While current deposit interest rates remain aligned with inflation, the outlook for inflationary pressures is rising. Persistently low deposit rates could make savings accounts less attractive to investors, prompting a migration of capital toward alternative investment channels such as stocks, real estate, gold, and foreign currencies.
The gold market, in particular, has emerged as a formidable competitor to traditional bank deposits, drawing significant investor interest. Meanwhile, a decline in domestic interest rates has widened the gap between Vietnamese dong (VND) deposit rates and interbank U.S. dollar (USD) rates, placing downward pressure on the VND/USD exchange rate.
This divergence has already impacted foreign investor sentiment in Vietnam’s stock market. Since the start of 2025, foreign investors have been net sellers, largely due to exchange rate concerns and the reallocation of capital to more lucrative markets abroad. In the first two months of 2025 alone, foreign investors offloaded more than VND 16.6 trillion (approximately USD 630 million) worth of Vietnamese stocks. Since early 2023, the cumulative net selling value by foreign investors has surpassed VND 134 trillion (about USD 5.2 billion), signaling a significant capital exodus.
While the government’s efforts to sustain economic momentum through lower interest rates are commendable, policymakers must also consider the broader financial implications. A prolonged period of artificially suppressed interest rates could lead to unintended consequences, including liquidity shortages, capital flight, and increased pressure on the exchange rate.
For a sustainable economic strategy, Vietnam’s policymakers should adopt a more nuanced approach. Instead of enforcing across-the-board interest rate reductions, a targeted policy framework could be more effective. This would involve maintaining competitive deposit rates to ensure banks have sufficient liquidity while selectively lowering lending rates for priority sectors such as manufacturing, agriculture, and technology.
Additionally, strengthening Vietnam’s financial infrastructure—by enhancing regulatory oversight, diversifying capital markets, and encouraging foreign direct investment—could help mitigate some of the risks associated with aggressive interest rate cuts.
Ultimately, interest rate policy is a delicate balancing act. While lower rates can stimulate short-term economic activity, maintaining the long-term stability of the banking system is equally crucial. As Vietnam navigates its economic roadmap for 2025, it must ensure that its monetary policy fosters sustainable growth without compromising financial resilience.
