The Majlis Research Center has released a report recommending policymakers to hold off further interest rate cuts, saying official decrees to control the money market will not help lift the economy.
It makes the case that the present mechanism for setting interest rates is open to question and then delves into the probable consequences of such decisions by the Money and Credit Council, the country’s highest monetary policymaker.
Arguing that fluctuations in inflation rates do not and should not necessitate a quick adjustment in interest rates, the study cites high inter-bank rates for short-term contracts as the reason behind the current volatile interest rates. The influential center claims that high inter-bank rates are rooted in the banks’ short-term deficits and calls on officials to first tackle this issue before imposing new rates on banks.
Another point mentioned in the report is that further rate cuts will only hurt “small savings and deposits of the people while banks rig the rules and pay rates of 25-28% on bigger deposits” with the intention of attracting big clients and companies.
The growing nuisance of unruly, uncertified quasi-lenders, which hold an estimated 900 trillion rials, ($30 billion) is another intricate problem mentioned in the report. It warns that “under the circumstances the true winners of further rate cuts will be such institutions,” without referring to their affiliations and close ties to powerhouses and vested interests.
“These lenders offer much higher rates compared to their law-abiding counterparts. Flight of money from certified banks and financial institutions to the uncertified lenders would be a foregone conclusion,” the report indicates.
Another measure deemed necessary by the authors of the report is that any decision to lower deposit rates should be followed by a cut in lending rates.
Failing to do so “would bring to light the possibility of a conspiracy by banks to increase their profit at the expense of depositors.”
The next point in the study relates to the balance sheets of banks. It claims that banks’ balance sheets are “full of problems and they face informal insolvency” that make further cuts difficult.
“Banks are facing a credit crunch which leaves them little choice but to attract deposits even at rates higher than the approved ones in order to survive.” It recommends revising and cleaning bank balance sheets as a higher priority than rate cuts.
The Majlis think tank criticizes the CBI-affiliated regulating body, the MCC, for making decisions which the authors of the report believe “will surely be ignored by lenders because they are not based on realities of the banking sector.”
The report warns that such decisions would only tarnish the image of the MCC and proposes focusing on the proper implementation of previous regulations regarding interest rates as” more necessary than making new ones.”
It concludes by saying that setting interest rates by decree is likely to fail and asks the Central Bank of Iran to find mechanisms that can help it manage interest rates without resorting to coercion.
“High interest rates are the result not the cause of the problems plaguing the banking sector. We have to tackle the roots and therefore the top priority must be reforming the legal structures of the banking sector and the quality of their assets.”
