Economy, Business And Markets

MCC to Finalize Interest Rate Decision

MCC to Finalize  Interest Rate Decision
MCC to Finalize  Interest Rate Decision

The decision on the long-debated issue of altering deposit and loan interest rates was set to be made today (Tuesday).

The Money and Credit Council chaired by the Central Bank Governor Valiollah Seif meets today to cut the interest rates.

As inflation has fallen to 15.5 percent from once 40 percent, President Hassan Rouhani, Economy Minister Ali Tayebnia, and Seif have all stressed the importance of cutting the deposit rate ceiling (for one-year deposits) from 22 percent to probably 20 percent as suggested by commercial banks last week.

If deposit rates drop, loan rates, currently standing at 26-28 percent, must be cut. Seif earlier said that the central banks may put the lending rate six percent above the inflation rate.

On Sunday, Tayebnia even called for lower rates. He said he prefers to set the deposit and lending rate ceilings at 18 percent and 20 percent respectively.

Earlier, Seyed Abass Mousavian, director of a central bank’s council in charge of vetting regulations’ compatibility with Islamic law, had proposed a formula suggesting that the deposit rate ceiling must be set 2-3 percent higher than the inflation rate.

With reports predicting that the MCC is likely to cut the deposit rate ceiling by at least two percent, some critics believe that it would adveresly affect the economy.

Supporters argue that if the government moves seriously  against unauthorized financial and credit institutions offering higher deposit rates, the plan to cut the interest rate would help curb rent-seeking activities. They also say 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, helping transfer new funds to capital markets.

However, critics argue that deposit rates should be determined by supply and demand, and not by a top-down directive. Likewise, they say capitals could be transferred from banks to the gold and currency markets rather than the equity market if deposit rates are cut, causing havoc in those markets.

Critics consider the high amount of non-performing loans and government debt to banks as main problems the banking system is facing, calling on the government to first address such problems.