Economy, Business And Markets

Banks Refuse to Cut Interest Rates

Banks Refuse to Cut Interest Rates Banks Refuse to Cut Interest Rates

Despite a meaningful decline in inflation in recent months, commercial banks still resist to cut interest rates on deposits and loans. The maximum rate lenders offer on deposits stands at 22 percent while it starts from 27 percent when it comes to business loans.

Monetary officials have called on banks to reduce interest rates in accordance with the inflation rate, arguing that high interest rates could damage the already ailing economy.

According to Central Bank of Iran, year-on-year inflation dropped from 32.5 percent in the month to April 20, 2014 to 16.3 percent in the month to January 20 this year.

Akbar Komijani, deputy governor of the CBI, has called it a “victory” for the central bank which managed to curb inflation, saying that the government has even targeted a 13-14 percent inflation rate, lower than previously predicted, for the next fiscal year, which starts on March 21.

Commercial banks had agreed earlier on a ceiling for the interest rate on long-term deposits, following reports that inflation continues to fall. However several banks violated the limit they agreed upon, causing a chaos in the money market. Other banks now argue that they are losing as customers prefer to deposit their money in the banks offering higher interest rates.

On the other hand, stock market experts stress that lower interest rates will help boost the capital market, calling on the government to interfere.

Experts say the decline in inflation has created the best opportunity for banks to lower interest rates. While inflation was increasing before the Rouhani administration took office, lenders argued that they must follow the inflation rate if they are to remain floated. So, they increased interest rates to avoid any losses. Now that inflation is curbed they ignore CBI warnings, Mehr news agency said in a recent article.

Every year when the fiscal year is ending, the CBI and the Money and Credit Council meet to make decisions on interest rates but this year the matters seem to be forgotten by both parties, the agency said.

Ali Tayebnia, minister of economy, says the interest rate on one-year deposits is now 22 percent, a ceiling that was approved by the MCC and confirmed by the CBI officials. He says that will remain unchanged until the end of the year, although the government continues efforts to curb inflation even further this year.

Lower inflation rate will reduce the total cost of money for banks. As a result, interest rates are expected to fall next year unless the government wants to load the burden of bankers’ mismanagement onto ordinary people, whose minimum wage, in contrary to interest rates, will be set in accordance with lower inflation.