The interbank rate stood near 20% for months before making a steady but subtle rise above 21% on Saturday.
It hit 21.14% to reach the highest in the past year and a half, according to data released by the Central Bank of Iran.
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 on hand.
An analysis by EcoIran web TV ascribes the rise in interbank rates to the monetary regulator’s policy to control inflation.
The CBI earlier said interbank rates increased slightly in the first two months of the fiscal year that started in late March as a result of its policy to curb liquidity supply in interbank market.
It noted that the interbank market saw oversupply and banks were in excess of liquidity thanks to the billions paid in cash subsidy by the government following its decision to eliminate currency subsidies for import and instead pay cash to the needy.
Struggling to avoid steep decline in interbank rates due to excess supply, the CBI reduced supply of overnight credit to lenders under repurchase agreement (repo) operation, causing interbank rates to rise.
The government in May officially put an end to the allocation of forex subsidies at the rate of 42,000 rials to the dollar to importers of essential goods and decided to pay cash to eligible recipients.
As a component of open market operation, repo is a form of short-term borrowing for dealers in government bonds. In case of a repo, a dealer sells government securities to investors, usually with short-term maturities, and buys it back the at the maturity date at slightly higher price.
Rise in interbank rates spurs fresh concern about the shift in investments to asset markets. Financial markets are usually impacted by fluctuations in interbank rates.
In particular, the share market has shown added sensitivity to interbank rates and financial experts see a positive correlation between share prices and interbank rates. As such, lower rates make investment in shares attractive while higher rates have the opposite effect.
The CBI is under mounting pressure to do what is needed to revive the struggling share market when crafting monetary policy. In one of the ten supportive measures announced by the government last December to lift the bourse, the CBI is obliged to “effectively intervene” in the interbank market and navigate average borrowing rates in the 20% region.
