The Central Bank of Iran said Wednesday that it would set the cap on interest rates for interbank deposits at 12%, up from the previous 10%.
In a press release on its website, the CBI said the decision was made to narrow the interest rate spread in the interest rate corridor (IRC) and will come into force on June 27.
The development is in line with CBI monetary policy to control inflation through open market operations and the IRC.
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.
OMO is a financial instrument through which central banks buy and sell securities to expand or reduce money supply. The mechanism allows central banks to buy government bonds to increase the money base (cash reserves) and by extension curb inter-banking lending rates. Selling government bonds reduces the base money and raises interbank rates.
Within this framework banks can hold bonds as collateral to borrow from the CBI.
Earlier in May, the CBI said it would implement more aspects of OMO that involves regulating the borrowing of lenders from the CBI by obliging them to put up enough collateral when seeking funds.
At that time the regulator set the cap for overnight interest rate for lenders that keep excess financial resources with the CBI at 10%.
It appears that the central bank has increased the rates with the aim to encourage lenders to deposit their excess liquidity with the CBI.
As per rules, lenders in need of liquidity will have to keep collateral with the CBI to borrow at 22%.
The CBI says this will create the IRC, which is pivotal to its plan to target inflation at a fixed 22% in the current fiscal year that ends in March 2021.
To realize its anti-inflation goals the CBI seems to have pinned much hope on the OMO to manage and control interest rates in the interbank market.
Trading in government securities, repurchase agreements (repo), offering credit in return for collateral (gold, currency and bonds) and lenders’ parking liquidity with the central bank comprises the operating instruments in the CBI monetary policy.
Repo is a form of short-term borrowing for dealers in government securities. In case of a repo, a dealer sells government securities to investors, usually on an overnight basis, and buys it back the following day at a slightly higher price.
