Rate Cuts to Propel Growth, Inflation

Financial Tribune –The Central Bank of Iran issued a new directive less than a week ago requiring banks to rigidly observe interest rates lowered a year ago by the Money and Credit Council in the latest move to loosen monetary policy. 

Hamid Zaman-Zadeh, the director of Research Department at the Banking and Monetary Institute, said the new monetary policy will most probably have inflationary effects in domestic markets, but as rate reduction and economic growth have become CBI priorities, a relative growth in inflation would be acceptable, Fars News Agency reported.

 “Last year, the Money and Credit Council reduced the ceiling for banks’ deposit rates to 15% while the interest rate of the government’s participatory bonds was set above 25%. However, since banks needed to absorb more deposits, they did not adhere to the regulations,” he added.

According to the new directive, the implementation of which is mandatory from September 2, banks and credit institutions are obligated to adhere to long- and short-term deposit rates set respectively at 15% and 10%.

In June of last year, MCC had approved the 15% deposit rate and 18% interest rate that had been agreed upon by bank CEOs earlier. But due to a variety of factors that keep challenging the embattled banks, including a hefty credit crunch, lenders were unable to stick to the rates and continued to offer interests higher than 20% on deposits.

Also in line with the new policy, CBI is allocating credit lines to indebted banks to reduce the cost of their funding–a move that some have criticized as encouraging banks to increase their overdrafts from CBI.

CBI has set a 34% interest rate for banks’ overdrafts while the interest rate of allocating credit lines is around 16-18%.