Interbank rates continued to climb last week reaching the highest level in seven years. According to EcoIran Web TV, rates posted 0.75% growth during the week to February 23, to reach 23%.
Interbank rates shot up in the past three weeks. The choppy rates two years ago were seen as one 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, among other things, with expansionary policies.
Interbank rate is 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.
Iran’s interbank market was established in July 2008 to improve oversight of bank liquidity, facilitate short-term lending among banks, help 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 over 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 10.5 trillion rials into banks in the interbank market via repo, down 15 trillion rials compared with the week before.
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 helping control runaway inflation, experts say the high rates will undermine the production sector in the long-term and discourage investment in asset markets.
Supervisory Measures
The Central Bank of Iran recently unveiled an online platform to keep track of overnight interbank transactions. The system is known as “Taba” (Persian acronym for electronic settlement of securities).
Taba is touted as an effective tool to implement monetary policies. Its main function is to register credit exchange among banks for short-term maturity (mainly overnight) under CBI supervision.
The CBI says Taba will help improve transparency in interbank transactions and identify banks that have surplus resources or face shortage of liquidity.
In the initial phase, it is expected to help the regulator better monitor transactions in the interbank market, giving it more supervisory clout over developments that usually lead to steep fluctuations in interbank rates.
In the second phase, Taba would be used for processing credit exchange based on which banks borrow from the CBI by putting up collateral.
The CBI hopes the platform will help it in improving open market operation by encouraging banks to use repurchase agreement (repo) and reverse repo in their interbank transactions.
