The Central Bank of Iran says it plans to modify interest rates to help strengthen the depreciating national currency, the bank governor Ali Salehabadi said.
“Interest rates could have been used as an instrument for implementing monetary policies. The rates have changed only twice in the past five years…We believe that the rates must be employed much more effectively,” Salehabadi told a press conference, IBENA reported.
He did not give any indication about which way the rates will go if and when they are tweaked.
In mid-2020, the Money and Credit Council (MCC), increased interest rates on one-year maturity deposits by 1 percentage point to 16%, on two-year deposits the rate was set at 18%. The rate for short-term deposits with 3-month maturity hiked by 2 percentage points to 12%. The regulator announced 14% for six-month deposits, up 3 percentage points while the cap on lending rates was 18% -- seen by most businesses as unaffordable.
Observers say so long as high inflation bites and returns on asset markets make a mockery of the paltry bank interest rates, subtle increase in rates will be unimpressive and be balked at by the masses whose life savings are shrinking as never before.
Interest rates are supposed to be useful financial instruments allowing governments to curb inflation, However, due to its misapplication over the years it has lost its efficacy as investors are averse to putting money in the stock market, companies face problems getting funds while the banking system is under pressure to keep interest rates between 21% and 22%.
Broad Money
The senior banker elaborated on recent changes in the growth of broad money estimated to decline under 30% before the calendar year ends in late March.
The CBI said broad money and the monetary base shot up again in the seventh calendar month to October 22. Broad money stood at 56,769.7 trillion rials ($160.8b) in the period, up 17.5% in seven months but 4.1 percentage points lower than the corresponding period last year when it was 21.6%.
On an annualized basis, broad money jumped 34.3% during the seven months to October 22, which was lower on the annual growth percentage in the first seven months last year at 42.8%.
“We have plans to reduce this figure to 25% in the next fiscal year (March 2023-24), the CBI boss said.
Last year a liquidity and monetary base committee was formed in the CBI whose task is to monitor trends on a monthly basis, report the reasons behind deviations if any, and propose possible solutions.
On the reasons behind the chronic inflation, Salehabadi said that at times it is due to the supply-chain inflation including international commodity prices. “Other critical factors pushing inflation are liquidity trends and the monetary base.”
Monetary base is the money central banks inject into the economy. The government has forex revenue, which the CBI buys and gives the government the rial equivalent. Later, the CBI injects the forex into the market and collects the equivalent in rial.
“Moreover, government and bank debt to the CBI also add to inflation in that they have a role in increasing the monetary base. At present, all these are at play at the same time.”
Roadmap
Salehabadi said that the CBI has a monetary plan which clarifies the future course of action by the end of the year.
“We will control the bank balance sheets because they have played a big role in creating inflation. Part of the money is generated by banks. To control money creation, banks in the past could only grow to a certain extent.
However, rules were hardly respected that led to countless problems. Now the CBI has adopted a more stringent approach and is penalizing banks that in the breach.”
To control bank balance sheets the CBI has set targets for each bank using the CAMELS rating system.
“Since the beginning of the fiscal year on March 21, the capital of state banks has grown by 350 trillion rials (more than $836.32 million). This was largely by selling shares. We have told other banks that they too should boost their capital. With the help of such measures we are trying to control the monetary base and liquidity.”
The governor claimed that inflation will be of the descending order from next year and the people will also see “s decline in inflationary expectations”.
Since the easing of Covid restrictions last year the services sector, including tourism, hospitality industry, restaurant business, etc., has logged 5.4% growth while industries and mining have reported growth, he said.
“We are committed to controlling liquidity and count on government and bank discipline to this end. A balanced and effective budgetary allocations can be of immense help. We have done our homework and determined the maximum amount of facilities a bank may offer.
These include loans for marriage, childbearing, house purchasing, etc. The CBI has urged the Parliament not to ratify anything obliging banks to give grant loans above the set thresholds.”
