The monetary regulator may consider the possibility of higher interest rates on bank deposits, the governor of the Central Bank of Iran said.
Speaking on the sidelines of a Cabinet meeting in Tehran Wednesday, Ali Salehabadi did not reject the prospect of raising rates to control inflation.
“The Money and Credit Council [MCC] has not yet made a final decision,” he said, referring to the top monetary and banking decision-making body, the CBI website reported.
Implicitly defending higher interest rates, the senior banker said they are a tried-and-tested tool to help tame inflation.
“With high and rising inflation across continents, many countries have adjusted their interest rates that delivered [produced the desired results],” he noted, adding that Iran should do likewise.
Russia’s invasion of Ukraine in February spawned a wave of inflation across the world, especially related to, but not limited to, food and fuel. Central banks in all corners of the world are struggling to control surging inflation and at the same time avoid recession.
Higher interest rates raise borrowing costs for consumers, businesses and governments, which tends to reduce spending and ease rising prices. But such moves are also likely to hurt economic growth.
The United States Federal Reserve increased its key rate by three-quarters of a point in each of the past two months to a range of 2.25% to 2.5%. The European Central Bank’s first increase in 11 years was a larger-than-expected half-point rise last month.
Low interest rates in Iran have undermined the people’s enthusiasm to keep their money in banks as the national currency tanks and galloping inflation eats away at their rainy-day savings.
The general goods and services Consumer Price Index registered a record high of 54% in the fourth month of the current fiscal year (June 22-July 22) compared to the same period last year, the Statistical Center of Iran reported.
The highest year-on-year inflation was registered for the food and beverages with 87% while communications saw the lowest YOY rate of 10.8%, it said.
The month-on-month and annualized inflation was 4.6% and 40.5%, respectively.
In mid-2020, the MCC slightly increased one-year maturity deposits by 1 percentage point to 16%. Likewise, interest on two-year deposits was set at 18%.
For short-term deposits with 3-month maturity the rate was increased by 2 percentage points to 12%. The top banking body approved 14% interest for six-month deposits, up 3 percentage points.
Observers say so long as galloping inflation persists and returns on asset markets far outpace the paltry interest banks pay, the subtle increase in interest rates will attract nothing but indifference of the people whose life savings are diminishing at a pace unseen in Iran’s banking history.
While the CBI says high interest rates will increase the cost of money for banks, there are valid concerns among academia and economists that low interest rates can and will push savers to close their accounts and look for safe havens to protect the value of their money.
Recently, concerns by stock market officials about the potential impact of rise in interbank rates prompted the CBI to intervene in the interbank market to bring down rates.
Interbank rates stood at 20.64% last Saturday after bucking a four-month rising trend a week before.
