The governor of the Central Bank of Iran, Ali Salehabadi, says the regulator will work to curb interbank rates in line with monetary policy.
Salehabadi reiterated the policy in a meeting Tuesday with the head of the Securities and Exchange Organization, Majid Eshqi, who voiced investors’ concerns about the detrimental impact of high interbank rates on the already struggling share market.
“There is a need for alignment of monetary and financial policies,” Salehabadi was quoted as saying by the CBI website.
Hovering near 20% for months, interbank rates have crossed above 21% in recent weeks and was 21.31% on Saturday, the highest in 18 months.
Interbank rates are interest charged on short-term lending between banks. Banks borrow money from each other to ensure that they have enough liquidity for immediate needs, or lend when they have excess cash on hand.
Rise in interbank rates in Iran spurs concern about the attraction of investment in asset markets.
The share market, long grappling with crisis, has shown added sensitivity to interbank rates and financial experts see a correlation between share prices and interbank rates. As such, lower rates make investment in shares attractive while higher rates have the opposite effect.
The CBI boss said interbank rates are determined by market forces but the central bank can and will intervene in the market based on its anti-inflationary policies.
“It should be noted that measures to support the capital market should be compatible with other government policies, namely taming inflation and reforming the banking sector.”
Appreciating the central bank’s inclination to address shareholders concerns, Eshqi said timely CBI decisions will address investors’ concerns.
However, he recalled that the extended decline in the bourse is not only due increase in interbank rates.
“It also is linked to the general decline in international commodity prices and setting arbitrary prices for goods [by the government], which has hurt listed companies and predictability in the capital market.”
Trigger Effect
Analysis by EcoIran web TV ascribes the rise in interbank rates to the monetary regulator’s policy to control inflation.
The CBI earlier confirmed that interbank bank rates increased slightly in the first two months of fiscal 2022-23 as a result of its monetary policy to curb excess liquidity in the interbank market.
The interbank market saw oversupply of funds and banks had excess liquidity thanks to the deposition of cash subsidy by the government after its decision to eliminate currency subsidy for imports of basic goods and pay cash instead.
Struggling to avoid steep decline in interbank rates due to excess funds, the CBI reduced supply of overnight credit to lenders under repurchase agreement (repo) operation, which pushed up rates.
In May the Raisi administration eliminated the allocation of subsidized currency to importers of essential goods and decided to pay cash to eligible constituencies (those at the lower end of the economic ladder).
As a component of open market operations, repo is a form of short-term borrowing for dealers in government bonds. In case of a repo, a dealer sells government securities to investors, usually with short-term maturity, and buys it back at the maturity date at slightly higher price.
The CBI has been under mounting pressure to do what is needed to help lift the crisis-hit share market.
In one of the supportive measures announced by the government in December to revive the share market, the CBI is obliged to “actively intervene” in the interbank market and navigate average borrowing rates in the 20% range.
