Interbank rates continued to climb last week reaching the highest in two years.
According to EcoIran Web TV, rates in the market posted 0.75% growth during the week to February 16, to reach 22.54%.
Interbank rates shot up in the past three weeks. The choppy rates two years ago were seen as a key factor leading to the collapse of the share market. Experts say low interest rates drive liquidity out of banks to the bourse and vice versa.
Market observers are of the opinion that the increase in rates, among other things, is indicative of the liquidity crunch in banks operating in the interbank market despite the central bank’s efforts to tame the uptrend with the help of expansionary policies.
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 money when they have excess cash.
Iran’s interbank market was established in July 2008 to improve oversight of bank liquidity, facilitate short-term lending among banks, maintain monetary discipline and underpin CBI monetary policies.
Expansionary monetary policy works by expanding the money supply faster than usual or lowering short-term interest rates.
The policy has been implemented through open market operations as the CBI in the past several weeks tried to inject funds into banks via the repurchase agreement (repo) and the so-called “structured borrowing”, in which banks put up government bonds as collateral with the CBI to borrow.
The regulator this week injected 25 trillion rials into banks in the interbank market via repo.
As a component of OMOs, repo is a form of short-term borrowing for dealers in government bonds. In case of a repo, a dealer sells government securities to buyers, usually with short-term maturities, and buys it back at the maturity date at a slightly higher price. The maturity date in Iran’s interbank market is usually seven days.
While the rising interbank rates are said to be going a long way in controlling runaway inflation, experts say the high rates will undermine the production sector in the long-term and discourage investment in asset markets.
