The Governor of the Central Bank of Iran briefed local bankers on the key aspects of the new economic/monetary incentive package that was unveiled on Saturday, the official website of the bank reported on Sunday.
Valiollah Seif said the government would do all it can “to preserve what it has achieved so far in reining in inflation and will keep close watch on any possible inflationary effects” of the new package.
“The CBI will routinely review the effects of the monetary package in relation to its effects on liquidity and the inflation rate and will make adjustments to the policies if they happen to stoke inflation beyond the target rate,” he noted.
The monetary policies that were developed to stimulate growth will be implemented in a lifespan of six months. Meanwhile, the regulator is committed to closely monitor the inflation rate and liquidity growth, governor said, adding that “These policies will be readjusted if the inflation rate deviates from the target.”
He elaborated on the three monetary dimensions of the new package, namely the banks’ reserve requirements with the CBI, stronger involvement in inter-bank operations and extending loans and credit facilities to consumers to kindle demand.
As to the reserve requirement ratio, the governor said the rate will be set “in the range of 10-13%”. The regulator also seeks to play a more effective role in the inter-bank market in order to mitigate the resource shortage that commercial lenders are facing. Car loans, credit cards, renovation loans for dilapidated buildings and financing energy conservation projects (as envisaged in the Budget Law 2015-16) are key aspects of the long-awaited incentive package that drew mixed reactions soon after it was announced.
The short-term policy was unveiled by President Hassan Rouhani’s three close confidantes, namely Seif, the Economy Minister Ali Tayyebnia and Mohammad Baqer Nowbakht, head of the Management and Planning Organization.
Rate by Decree Ineffective
The Money and Credit Council does not believe “dictated interest rates produce the desired results and economic realities should instead determine the rates at acceptable levels,” the CBI chief said on Saturday.
Confirming the position of Valiollah Seif made at a press conference, the Economy Minister Ali Tayyebnia who was also present among reporters, said “Our goal is definitely to lower interest rates as it is neither improving the economic situation nor manufactures.”
He denied media reports that the government, saddled with huge economic problems and recession, intends to dictate deposit/lending rates. “It is apparent that high demand for money raises interest rates, which can be mitigated by improving the resources of lenders.”
Seif noted that since the involvement of the regulator in the inter-bank market, the rate has dropped to 26% from 29%. “As the implementation of the new polices continues, resource shortages that lenders are facing will be addressed that in turn will lower interest rates.”
Quantitative Easing
The Central Bank of Iran has decided to adopt quantitative easing policy in a bid to stimulate demand, help maintain economic stability and check inflation, according to head of the Monetary and Banking Research Institute, the Persian-language Eghtesad News website reported Sunday.
To this end, the regulator is set to reduce reserve requirement ratio for disciplined banks from 11.3% to 10% to enhance their lending power and lower interest rates, Ali Divandari, said.
The measure which is an incentive only for disciplined lenders is expected to improve their compliance with benchmark interest rates and also channel liquidity into productive and healthy economic activities instead of speculative businesses geared to easy money, he said.
“The decision is also expected to soon increase liquidity in banks and promote monetary and fiscal discipline at the same time because banks grappling with resource shortages will not need to resort to high interest rates to attract deposits and savings,” the official added.
