The Money and Credit Council has allowed lenders to raise interest on term deposits, a move seemingly to curb the scale and scope of money flooding into some financial markets and to avoid further depreciation of national currency.
Iran’s top monetary decision-making body decided late on Tuesday to raise interest on one-year maturity deposits by 1 percentage point to 16%.
Likewise, interest on two-year deposits was set at 18%. On short-term deposits with 3-month maturity, the rate increased by 2 percentage points to 12%, the Central Bank of Iran website reported.
MCC approved 14% interest rate for six-month deposits, up 3 percentage points.
The newest measure is in tandem with efforts “to protect the value of the national currency” and “diversify bank deposits”.
Apart from increasing deposit rates, what is new is the revival of two-year deposits. Banks for years were not allowed to keep people’s money for more than one year and long-term deposit contracts one-year maturity.
The new development comes barely three months after CEOs of private banks said they would set the interest rate on term deposits at 15%. Before that they could raise rates up to 18%.
CBI officials say the bank is determined to curb the voluminous money supply to curb inflation near the declared 22% target.
Regarding the instability sweeping through financial markets, observers say the regulator’s bold inflation target is farfetched unless it effectively manages to control the flow of money.
Prices are rising daily in the bourse, forex, gold, auto… markets unusually driven by high inflationary expectations. This has compelled the CBI to step up efforts and take serious measures to control inflation.
Package of Measures
Earlier last week, the central bank allowed lenders to raise the ceiling for issuing certificate of deposit up to a level that doesn’t cross 20% of their total long-term deposits by the end of last fiscal year (March 19). It allowed banks to issue CDs at 18%. The decision is valid until Sept 22.
The CBI Governor Abdolnasser Hemmati has spoken about a plan to launch a euro-denominated certificate of deposit to try and reduce money in public hand and downsize the money supply.
In a note on his social media account, Hemmati said the euro-denominated CDs will bear fixed interest rates and could be sold to buyers at market rates.
The senior banker said the CBI would soon send the proposal to the MCC for approval.
Certificate of deposit is offered by banks and credit institutions, providing a fixed interest rate in exchange for the customer agreeing to leave a lump sum untouched for a predetermined period of time.
Convergence With Bond Market
The new deposit interest rates coincide with increase on bond yields in the debt market. At the weekly bond auction on Tuesday, the Economy Ministry accepted to raise bond yields up to 19.2% compared to 15% in the May auctions.
The measures come on the heels of mounting concern about the impact of huge money supply on consumer prices.
In a recent report the CBI said money supply reached 24,721.5 trillion rials ($107 billion) when the fiscal year ended on March 19.
It grew by 5,893.5 trillion rials ($25.5 billion) during three months (to June 21) – a 31.3% jump and one of the highest in the past five decades.
“The CBI intends to slow the money supply growth and make bank deposits attractive,” Payman Qorbani, a CBI vice governor was quoted as saying by Tasnim News Agency.
While lenders say the high interest rates should increase the cost of money for banks, there are obvious fears that low interest rates can push the people to close their accounts and look for other safe havens to protect the value of their savings.
Based on CBI data, sight deposits are growing at a higher pace and term deposits are losing appeal.
Total sight deposits increased by 58.9% by the end of the last fiscal year to reach 3,661.6 trillion rials ($16 billion).
This is while term deposits grew at a slower pace (26.8%) to reach 18,568 trillion rials ($80.5 billion).
Long term deposits were 11,486 trillion rials by March 2020, up 30.6% compared to the same period a year ago. Short-term deposits rose 21.1% annually to 7,081 trillion rials.
Economic and financial experts have warned that CBI’s procrastination in adopting contractionary policies could result in a bigger portion of long-term deposits turning into sight deposits.
