The most immediate challenge stems from a shift in expectations around the U.S. Federal Reserve’s policy path.

At its March 18 meeting, the Fed held interest rates steady at 3.5-3.75% and signalled a cautious stance, projecting only one rate cut this year - well below earlier market expectations - while also flagging the possibility of renewed tightening amid persistent inflation risks.

The shift has reverberated across global financial markets, pushing U.S. Treasury yields higher and strengthening the dollar, thereby increasing pressure on exchange rates in emerging markets, including Vietnam.

Vietnam’s foreign exchange market has seen rare volatility in the past 10 days. The U.S. dollar traded as high as VND27,700 on the informal market, while bank rates ranged between VND26,200 and VND26,340. A swing of VND800-1,000 within less than 10 days, alongside bank rates repeatedly nearing the upper trading band, signals mounting pressure on the currency.

External factors are not the only source of strain. Vietnam recorded a trade deficit of nearly $3 billion in the first two months of the year, increasing demand for foreign currency at a time when foreign exchange reserves are no longer very abundant.

Nguyen Tri Hieu, a senior banking expert and former independent board member of An Binh bank, said this dynamic is intensifying exchange rate pressure while raising the risk of imported inflation.

In this context, the State Bank of Vietnam, the country's central bank, faces a policy dilemma. Keeping VND interest rates low to support growth could widen the VND-USD rate differential, encouraging capital outflows and weakening the currency. Raising rates to defend the dong, however, would increase borrowing costs for businesses and threaten growth targets.

Meanwhile, geopolitical tensions in the Middle East, particularly involving Iran, are adding to global inflation risks. Brent crude prices have surged above $100 per barrel, at times exceeding $110 in March, amplifying cost pressures for import-dependent economies like Vietnam.

Three inflation transmission channels are becoming increasingly evident: rising input costs as more than 90% of imports are production goods; higher energy prices feeding into transport and food costs; and inflation expectations, as increases in gold prices and exchange rates fuel precautionary hoarding and price adjustments.

Gold markets are also emerging as a volatile factor. Heightened demand for safe-haven assets amid global uncertainty could drive further price increases, reinforcing “goldization” trends and adding pressure to monetary conditions and the exchange rate.

Domestically, the banking system faces structural challenges, particularly a mismatch between credit growth and deposit mobilization. In the first two months of 2026, credit expanded by 1.4% while deposits rose only 0.36%, forcing banks to raise deposit rates to shore up liquidity.

Deposit rates have established a new baseline. As of March, 12-month deposit rates ranged from 5.2% to 7.2% per annum, with smaller joint stock banks offering the highest rates at 7-7.2%, while state-owned lenders maintained lower levels of around 5-5.2%.

In addition to official rates, “special” deposit schemes offering 8-9% have begun to appear, typically tied to large balances or promotional programs. Some banks have offered rates as high as 9% for 12-13 month deposits under specific conditions, reflecting intensifying competition for funding.

The trend is expected to persist in the first half of the year, with 12-month deposit rates likely to rise by another 0.5 percentage points, pushing up lending rates, increasing corporate financing costs, and compressing banks’ net interest margins.

Underlying liquidity pressures partly reflect lingering effects from 2025, when prolonged low interest rates drove capital into assets such as gold and real estate, while shortening deposit tenors even as credit demand remained concentrated in medium- and long-term lending.

As monetary policy space narrows, economists say fiscal policy will need to play a greater role in supporting growth. Vietnam’s planned development investment spending for 2026 exceeds VND1,100 trillion ($41.75 billion), up about 40% from the previous year. Effective disbursement could boost growth and ease liquidity pressures in the banking system.

However, policy coordination remains complex. Tightening monetary policy to stabilize the currency while expanding fiscal spending to stimulate growth could further complicate inflation control.

Against Vietnam’s 2026 targets - GDP growth of at least 10%, inflation below 4.5%, and credit growth of around 15% - policy room appears increasingly constrained.

Dr. Nguyen Tri Hieu said achieving both high growth and low inflation under current conditions is nearly impossible, arguing that inflation control should take priority to maintain macroeconomic stability and anchor market expectations.

Dr. Can Van Luc, a member of the National Financial and Monetary Policy Advisory Council and chief economist at state-controlled BIDV bank, said exchange rate and interest rate pressures in Vietnam are rising amid the global policy shift.

“The Fed maintaining higher rates for longer will put pressure on the VND-USD interest rate differential, directly affecting exchange rates and capital flows,” he said, adding that Vietnam should prioritize macroeconomic stability, particularly inflation and exchange rate control, over excessive easing.

From an international perspective, Tim Leelahaphan, an economist at Standard Chartered, echoed similar concerns, saying Vietnam’s room for monetary easing is limited amid rising inflation and currency pressures, and that maintaining macro stability should take precedence even at the expense of short-term growth.

In practice, the central bank is likely to adopt a “controlled flexibility” approach, combining multiple tools rather than relying on a single measure. These may include foreign currency interventions to ease exchange rate pressure, open market operations to manage short-term liquidity, and allowing a moderate depreciation of the dong of around 2-3% to support exports.

Over the longer term, experts emphasize the role of fiscal measures, particularly tax and fee reductions to support businesses, rather than excessive reliance on credit expansion.

The first half of 2026 is shaping up to be a critical test for Vietnam’s policymakers. In a highly volatile environment, there are no perfect choices - only carefully calibrated trade-offs.

Maintaining macroeconomic stability, controlling inflation and preserving confidence in the domestic currency may ultimately serve as the most important anchor, even if it comes at the cost of slower growth in the short term.