The Money and Credit Council (MCC), the top decision-making body of financial and monetary markets, is expected to increase interest rates, an unnamed official was quoted as saying Tuesday.
"The issue is currently under review and the majority of MCC members have supported higher rates…However, nothing is finalized yet," he told Tasnim News Agency.
The report comes after the Central Bank of Iran Governor Ali Salehabadi's recently commented on change in deposit rates.
"Interest rates should be revised to help strengthen the depreciating national currency. Interest rates should be used as an instrument to reinforce monetary policies… Rates have changed only twice in the past five years," he said this week.
In mid-2020, the Money and Credit Council (MCC), increased interest rates on one-year maturity deposits by 1 percentage point to 16%, on two-year deposits the rate was set at 18%. The rate for short-term deposits with 3-month maturity hiked by 2 percentage points to 12%.
The regulator announced 14% for six-month deposits, up 3 percentage points while the cap on lending rates was 18% -- seen by most businesses as unaffordable.
ISNA in a recent report claimed that banks favor 3% to 5% increase in interest rates, though the MCC has not yet asked for their opinion.
Early this month the regulator warned lenders to play by the rules following persistent reports that some banks were offering more than 20% on deposits to attract big money. Using assorted pretexts, banks over the years have cajoled the CBI to raise the rates to entice major depositors.
Despite persistent warnings by the CBI, banks reportedly continue to offer higher interest rates on deposits -- up to 22% and 24%.
Banks say the rates must be raised in tandem with the high and rising inflation to make deposits attractive for savers. Interest that banks offer on deposits at best is less than half the annual inflation rate and in many cases far much lower.
The average goods and services Consumer Price Index in the 12-months ending Nov. 21 increased by 50.2% for the first decile (the lowest income households) and jumped 41.7% for the 10th decile (the highest income).
Possible Solution
Interest rates apparently are used as instruments allowing governments to fight high inflation and also help safeguard the share market. However, due to its misapplication over the years it has lost its purpose for being in Iran as investors are averse to putting money in the stock market, companies face problems getting funds while the banking system is under pressure to keep rates between 21% and 22%.
Peyman Mowlavi, an economist, says, “For years officials have reiterated that they will reduce lending rates to help businesses grow. But what has actually happened is that with lower rates a select few [vested interests] with special access to bank resources have borrowed to invest in asset markets and in the process pocketed millions as inflation skyrocketed.”
He says, “This is while the majority of the people, manufactures and stock companies have little if any access to loans with nominal interest rates. Despite the fact that rates are [and should be] effective in controlling inflation, they are hardly used as expected in our country and have in fact lost relevance.”
The economist has proposed a three-point solution that must move in tandem if the government really cares and wants to salvage the economy from the worsening crisis.
“The first is he need for a 4-year action plan to rewrite monetary policies to bring down inflation to single digits. The second is to get rid, once and for all, of the crippling government-imposed pricing policy, reducing the [unwanted] role of the Ministry of Industries, Mining and Trade in the markets, and eliminating concepts that create and encourage rent-seeking.
And finally, the Securities and Exchange Organization must uphold transparency norms vis-à-vis the capital market. These three steps, a single forex rate and reduced political and social risks can help gradually rebuild this wrecked economy.”
CBI Data
Meanwhile, CBI figures show term deposits increased at a noticeable pace compared to sight deposits indicating savers are now ready to park money for longer periods in banks.
Total sight deposits reached 1,127 trillion rials ($36.4 billion) by the end of the fifth calendar month to August 22 -- 59% higher on the same period last year. It was up 25.2% from the end of the last fiscal year in March.
Sight deposits had been the laggard for months due to the deep recession in asset markets. Now that seems to be changing. Decline in term deposits is usually construed as a sign of rise in inflation expectation.
