Higher interest rates on deposits will help curb inflation under the right conditions, economic commentator Hossein Mahmoudi Asl said.
“Inflation can come down [only] if the new interest rates are in sync with inflation rates and can convince the people to keep their money in the banks,” Mahmoudi Asl he was quoted by IBENA as saying.
“What is more important though is from where the money will come from to pay the higher rates?”
For any chance of relative success in taming skyrocketing inflation with higher rates it is “incumbent that domestic production play a key role. Banks must invest the people’s savings in manufactures and provide funding via loans for raw material… to help keep production lines open,” he analyst added.
Consumer inflation in Iran has rocketed above 50% in recent months making a bad situation worse for the tens of millions at the lower end of the economic ladder, namely fixed-wage earners and retirees.
“After the loans are repaid banks can pay the higher interest as the Central Bank of Iran has apparently decided.”
Mahmoudi recalled that the profit margin of most production companies in Iran is in the region of 13%, and this is the primary reason banks refuse to lend to such companies.
“This means the production units are unable to repay the loans. Truth be told, if interest on deposits rise the same will be true for lending rates, which would make it harder for returning businesses loans. What banks largely do is to lend to the trade sector where profits are higher and risks lower. But at the same time this trend has actually created an army of middlemen and fixers and disrupted markets.”
He noted that the key missing link in all this is a robust manufacturing sector able and willing to repay what they borrow.
“If and when this happens the loops will form a vibrant chain. At the outset banks must make it clear in unambiguous terms to which sector they will be giving money that comes from the people’s savings. If past patterns continue and brokers and intercessors get the loans inflation will rule,” the analyst warned.
The Money and Credit Council (MCC), the top decision-making body of financial and monetary markets is expected to endorse the higher rates. The former CBI chief Ali Salehabadi last week commented on the potential higher rates.
The Executive Board of the Central Bank of Iran recently allowed banks to raise the interest rate on certificates of deposit (CDs) up to 23%.
CDs provide a fixed interest rate in exchange for the customer agreeing to keep a lump sum untouched for a fixed period. Usually the time limit is one year but if a client wants to withdraw, the interest rate is cut as a penalty.
Data published by Rade, a local website comparing banking services, shows that all banks had been offering CDs at 18%.
Local media outlets interpreted the CBI move on CDs as paving the way for the much-debated higher deposit rates. EcoIran Web TV quoted an informed source as saying that the CBI will soon allow banks to increase interest on deposits by 5%.
In mid-2020 the 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 was hiked by 2 percentage points to 12%.
