Economy, Business And Markets

New Incentives Should Adjust Interest Rates

New Incentives Should Adjust Interest RatesNew Incentives Should Adjust Interest Rates

The new economic policy package to be unveiled on Saturday will pave the way for the full enforcement of interest rates, a bank official told IRNA.

Welcoming the outlines of the economic incentive package mentioned by President Hassan Rouhani in a live TV interview this week, Abdol Nasser Hemmati, head of the state-owned banks' coordination council, hoped the move would help fully implement the 20% deposit rate approved by the Money and Credit Council six months ago but not fully embraced by commercial banks.

The new package, inter alia, calls for further cuts in interest rates in line with the declining inflation rate and support domestic production.  To this end, the official stressed that "not only the interest rates but also the cost of money should decrease" which was the reason for the first rate cut in April.

Hemmati regretted that the new benchmark rate was not fully observed by lenders due to their capital shortage and government's massive debts to the banking sector. "As was said earlier, four major steps including a cut in reserve requirement ratio and inter-bank interest rates and close monitoring of deposit rate implementation and overdrafts are essential for further reduction in banking deposit rates."

Hemmati hailed government plans to stimulate demand and create the instruments for increasing the people's purchasing power and said, "Recession has led to the rising inventories. For this reason banks should increase lending for purchasing debts or commodities."

On the reasonable estimation for the inter-bank interest rate, Hemmati said, "The rate should be around 22.5-23% considering that the deposit rate is 20% and reserve requirement 13%." However, he stressed that the rate should not encourage lenders to focus on long-term deposits.

In the new policy package, the government plans to stimulate demand and create the conditions to lift purchasing power.

Around 75 trillion rials ($2.49 billion) will be allocated to quick-return development projects and production sectors in the coming weeks.

Some production sectors, particularly those related to non-oil exports, will also be subsidized. In a bid to stimulate demand, loans will be offered to people who intend to purchase durable goods. Around 20% of the new resources will go to people wanting to buy commodities. New conditions will be set including long-term installments.


>> Impact on Housing Sector

On the possible impact of lower interest rates on the housing market, Mohsen Tabatabie, secretary of a special Association of Urban Economics ruled out any significant change in the housing market but warned that "rents may go up."

He predicted that lower interest rates could once again encourage property developers and builders to apply for cheap loans which could eventually result in a boom in the housing sector. But he warned that "In the absence of demand and low purchasing power of home buyers, it is also likely that such loans may find their way into other markets."

Noting recession in the majority of markets and less volatility in gold and foreign exchange market, he expected "rents to serve as a lucrative market for investment, shifting the tendency among home owners from selling to renting their units."

In late April, the Money and Credit Council reduced the cap on one-year deposit interest rates by 200 basis points to 20%.