Economy, Business And Markets

Banks Agree to Cut Rates

Finance Desk
Banks Agree to Cut Rates
Banks Agree to Cut Rates

Senior bankers reached a deal Saturday to lower deposit rates, ending weeks of wrangling on whether or not a rate cut by the Central Bank of Iran would be met with lenders' approval.

CEOs of commercial banks announced after their meeting that they had agreed on a two percentage point cut, to bring deposit rates down from 20% to 18%. The decision, which is expected to be approved by the CBIs Money and Credit Council at its next meeting would mark the second rate cut this year (started March, 21).

Back in April, the MCC - the highest monetary policymaker- voted to cut deposit rates from 22% to 20%, a move which was touted to render the climate "more business friendly". The measure also saw lending rates fall to 24% from 26%. In Saturday's meeting however, no announcement was made regarding lending rates, seen by many industrial and business leaders as prohibitive.

Although economists were divided on the issue, further rate cuts seemed inevitable in light of the government's relative achievements in curbing the galloping inflation.

With strict monetary tightening measures, President Hassan Rouhani's administration managed to lower inflation from a giddy 45% in 2012, to 15% in June of this year.

A prolonged and painful economic recession, however, finally prompted government policymakers to change course and launch a quantitative easing program.

Last month the government released a new policy package to stimulate the economy by encouraging spending through cheap loans and consumer financing.

The cut in interest rates along with the incentive package is hoped to lift the economy ravaged by years of stagnation, prompting some to argue that the cut in inflation rates was partly instigated by a lack of economic activity.

Some analysts have gone as far as advocating rates as low as 12%, arguing that high rates have stalled the economy by hurting the key manufacturing sector.

Bankers' Way

The announcement by bank CEOs is also significant since it was independently endorsed by the bankers. Previous rate cuts were strongly criticized because they were "imposed" on lenders without prior consultation with them. The top-down directives had also served as an alibi for banks to disregard benchmark rates in the past.

Kamel Taghavi Nejad, CEO of the state-owned Bank Sepah told Fars News Agency after the meeting that the rate cut agreement was in line with the administration's and CBI's policies to reduce the cost of money.

"Another decision made by bankers was to lower the inter-bank rates from 26% to 24% so that the CBI would not lend to banks at rates higher than 24%," Taghavi Nejad added.

CBI chief Valiollah Seif had previously stated that his bank sought to lower interest rates indirectly, namely by entering the inter-bank market.

A likely hurdle in the way of interest rate reforms, however, is the toxic influence of the army of uncertified credit and financial institutions whose exorbitant rates tend to entice customers away licensed commercial banks. The government, however, has taken a tough line against these financial companies, promising to resolve the issue before the Iranian year is out (March 2016).

Other barriers to interest rate cuts are the government's massive debts to the banks, ballooning bad loans and high inter-bank interest rates.