Interbank rates continued to rise this week for the sixth consecutive week amid the central bank’s expansionary measures.
It surged to 19.35% to hit the highest level in the current fiscal year -- up from 18.29% almost a month ago.
The steady increase is apparently due to the unprecedented lenders’ liquidity crunch in the interbank market despite the CBI’s efforts to tame the uptrend with the help of expansionary policy.
Expansionary monetary policy works by expanding the money supply faster than usual or lowering short-term interest rates.
Analysis by the Persian-language economic website Eqtesad News show the Central Bank of Iran injected an average 358 trillion rials ($1.3 billion) in the interbank market in recent weeks under open market operations.
Within the OMO framework, lenders borrow credit from the CBI under the so-called structured interbank lending, which refers to a process through which banks put up bonds as collateral with the CBI to borrow money.
During the OMO implementation this week, the CBI on Tuesday said it injected credit worth 190.4 trillion rials ($705 million) into nine banks and credit institutions under the repurchase agreement (repo). The bank also gave 95 trillion rials ($350m) in “structured lending” to five lenders.
As a component of OMO, repo is a form of short-term borrowing for dealers in government bonds. In case of a repo, banks in need of liquidity sell government securities to the CBI, usually with short-term maturities, and buy it back at the maturity date at slightly higher prices.
There are divergent views about high interbank rates. Some experts are of the opinion that “significant increase” in interbank rates will go a long way in controlling the present runaway inflation.
In contrast, financial experts say high interest rates will undermine the production sector in the long-term and l discourage investment in asset markets, namely the stock market.
Kamran Nadri, a banking expert in favor higher rates, says the interbank rate is a natural response to liquidity shortage in the interbank market.
“Rates go up due to the rise in borrowing from the CBI. More so, it indicates that the banking sector is facing liquidity deficits,” he was quoted as saying by ISNA.
He criticized the CBI for not letting the rates rise further, arguing that high interest rates will curb expansion of money supply by banks, which by extension, will reduce inflation.
Major asset markets, such as the bourse and currency market, are highly sensitive to interbank interest rates. Lower rates make investment in such markets rewarding while higher rates make it less attractive.
Earlier Mohammad Ali Dehqan-Dehnavi, managing director of the Securities and Exchange Organization, called on the central bank to regulate bond rates to levels that won’t undermine the bourse and the appeal of stock investors.
