T he central bank is pushing to cut interest rates, through the Money and Credit Council, said the bank’s governor, as it tries to keep a balance between curbing inflation and protecting business investment.
“The bank wants to organize lending rates by passing the decision to cut interest rates in the Money and Credit Council, in turn gradually reducing lending rates and as a result deposit rates,” Valiollah Seif told the press late Wednesday.
Banks have proposed a 200 basis point cut in deposit rates, which the central bank agrees to. In previous agreements and directives the central bank set the ceiling for the rates, and banks could offer interest rates at their own discretion, as long as they did not breach the ceiling, said the governor, as reported by IRNA.
“From a macroeconomic standpoint, an excessive rise in lending rates and their discrepancy with key economic indicators, can in its own right, have negative effects on investment and manufacturing, thus we must have a balanced approach,” Seif added.
The central bank wants to “keep real interest rates positive, while keeping borrowing rate s reasonable,” said the bank’s governor. The bank’s analysis shows that there are few businesses that can borrow at current rates.
The central bank wants to specify a viable range for rates based on risk, and allow banks to operate their business accordingly. “Of course, if a bank can prove that the lending rate should be higher for a certain project, the CBI will allow it,” Seif said.
What the central bank is actually aiming for is a two percent real deposit rate and a four percent margin for banks, putting lending rates six percent above inflation.
Major banks were brought in line with CBI’s policies at the start of last year, said Seif. “Banks reached an understanding on keeping rates reasonable and avoiding destructive competition.” But, the agreements didn’t hold as unauthorized financial institutions offered much higher rates to depositors, prompting banks to forgo the agreement.
The central bank sought to get banks on board again, in October. “The central bank’s investigations show that things are improving” and compliance has increased.
Furthermore, the regulator wants to protect depositors from risky usage of their money by financial institutions. “If banks use deposits in risky transactions and activities, in a way that there is a probability of losing the deposits, not only depositors’ interests will be at risk but it will jeopardize the entire banking system,” said the bank’s chief.
No Negative Shock Expected
As debate on the interest rate cuts is raging, a member of parliament has backed the central bank’s position on the issue saying, the cut will have no adverse shock on the economy.
Regarding money and capital markets as two main attractions for the investors, vice president of the parliament economic committee, Abouzar Nadimi, said that he opposed the idea that lowering deposit rates would weaken the attraction of depositing savings in banks.
“Due to the economic sanctions against Iran, investors are reluctant to deal with problems facing commercial activities. Thus, they prefer to invest in the money and capital markets or in the manufacturing sector,” he said, as quoted by IRNA.
Although the decrease in deposit rates makes the capital market more demanding for investors, yielding them higher profit, they are required to take higher risks as well, due to the inverse correlation between risk and return, the lawmaker noted. However, he added, the money market would be still interesting as a low risk investment opportunity for many.
The lawmaker urged the government to act against unauthorized financial and credit institutions offering higher deposit rates than those set by officials. “The government should help curb rent-seeking activities,” he added.
Nadimi said he believes the decline in deposit rates will result in a drop in loans’ interest rate, and accordingly a rise in demand for loans, a trend that could lead to more investment and further economic growth.
In fact, by narrowing the gap between inflation and deposit rates, the suggested plan aims to encourage investment by decreasing the cost of financing from the banking system to provide producers (loan applicants) with low-cost loans.
