Data published by the Central Bank of Iran on Sunday suggest interbank rates have increased steadily for three weeks in a row.
The rate presently stands at 18.5%, the highest since July 29. It is, however, slightly lower than 18.61% reported in mid-July.
The Persian-language economic website Eqtesad News linked the rise in interbank rates to liquidity strain in the interbank market. It said “meaningful increase” in the so-called structured interbank lending is a sign that lenders are tight on liquidity. Structured lending is a process through which banks offer bonds as collateral with the CBI to borrow.
The development is seen as a bad omen for investors in asset markets, giving rise to speculation that the monetary regulator seeks to raise rates to tame the surge in asset prices.
Major asset markets, such as stock and currency, are highly sensitive to interbank rates. Lower rates make investment in such markets rewarding while higher rates have the opposite effect.
The CBI in a press release last month said it would revise policy rates in the interbank market if it sees inflation expectations are rising.
The policy interest rate is one the monetary authority sets to influence the evolution of main monetary variables in the economy (consumer prices, exchange rate or credit expansion, among others).
“If spike in asset prices signals rise in inflation expectations, and the descending order in interbank rates persists, changes in the interest rate corridor [IRC] may be required,” the CBI said.
IRC is a system for guiding short-term market rates towards the central bank’s target/policy rate. Under the IRC structure, the CBI sets the floor and ceiling of policy rates and lets other money market rates, such as interbank rate, move within this setup. The interbank deposit rate (the lower bound of IRC) is presently 14% and the upper bound is 22%.
Choppy interest rates in the last fiscal year that ended in March led many to accuse the central bank of undermining the stock market by manipulating interest rates.
As per CBI data, the average interest rate dropped to 11.71% in May 2020 from 16.68% a month earlier. It further declined to 9.72% in the month to June 22. This coincided with an unprecedented bullish trend in the bourse.
The rates moved upward to reach 14.79% in the month to July 22 last year before rising further to 19.97% and reaching 22.63% by mid-October before declining again.
Market observers say the sharp decline in interbank rates last year was a “positive signal to the stock market” and the main cause behind the departure of liquidity from banks to the bourse. The CBI has denied any role in manipulating the rates.
