The hippocampal formation is a crucial region in the encoding and retrieval of memory, thought to be mediated through ensemble formation and recruitment or intrinsic attractor dynamics. Additionally, it has been shown that overall hippocampal population activity reflects environmental novelty. However, a common neural basis supporting these two processes remains unknown. Furthermore, many memories contain overlapping features, and it remains to be established how specific memories are retrieved without interference in the hippocampus. We propose that both engram and attractor models hinge on lateral inhibition to perform specific retrieval, as well as encoding of novelty. We tested these predictions using chemogenetic inactivation of ventral subiculum (vSub) parvalbumin-positive (PV+) interneurons, miniscope calcium imaging, nucleus accumbens GRAB-DA2m fiber photometry, and local field potential recordings, in freely-moving mice. Mice learned to discriminate different auditory cue-outcome associations across valence, with downstream dopamine release reflecting their outcome predictions. Inactivation of PV+ interneurons led to confounding recall of cue-outcome relationships while leaving performance intact at behavioral and neural levels. Furthermore, PV+ interneuron inactivation prevented habituation, maintaining novelty signaling to familiar cues and contexts. These data suggest that at the individual cell level, lateral inhibition supports independent recruitment of memories with common features during recall, and that in the absence of stable predictions, reduced global inhibition at the population level supports novelty coding. We provide both behavioral and neural evidence supporting lateral inhibition as a common basis for efficient memory retrieval and novelty in the hippocampus that is compatible with both engram and dynamical systems models.