Economy, Business And Markets

Interest Rates: A Doubled-Edged Sword

Interest Rates: A Doubled-Edged Sword
Interest Rates: A Doubled-Edged Sword

The Money and Credit Council – the highest monetary policymaker - is set to review interest rates today, a member of the council said.

Branding interest rates as a double-edged sword for the economy, Mohsen Jalalpour said “The MCC is uncertain about further cuts in deposit rates for three reasons, namely the problems posed by unauthorized financial institutions, liquidity shortage in commercial banks and possible capital flight from banks.”

Lower deposit rates would prop up demand for loans and lead to rent-seeking by vested interests, Jalalpour said. “A rate cut should be consistent with the lending power of commercial banks.”

The official warned that a further deposit rate cut may also tempt the people to invest in speculative activities in the hope of higher returns. Meanwhile, “unauthorized financial institutions that on the verge of bankruptcy could seize the opportunity to attract and squander people’s savings.”

The Central Bank of Iran, according to Jalalpour, is against further cuts in lending rates. The regulator argues that “It is not necessary to lower lending rates as there is still demand for money at the current rates.”

Critics of the argument claim that such demand is not real and people who apply for expensive loans are debtors in desperate need of cash to avoid bankruptcy or a day in the courts.

Jalalpour stressed that the problem of local manufacturers and the private sector will not be solved with “petty cuts in lending rates and called on policy and decision makers to set special rates for manufacturers trying to survive under the heavy burden of loans and soured debts.

Nevertheless, the official said such largesse should not be extended to those who unduly enjoyed government-subsidized foreign exchange in the past and splurged the loans on purposes other than were mentioned on their application forms.

MCC Commended for Deferring Rate Cut

Meanwhile an advisor to the minister of industries, mines and trade said the Money and Credit Council was right in deferring the decision to further cut deposit rates.

Imposing new shocks on deposit rates may lead to capital outflows from banks and volatility in the real estate or gold markets. “The Money and Credit Council has duly recognized the risk and postponed the decision until all aspects of the move have been thoroughly examined,” Ahmad Pourfallah told Fars News Agency.

He regretted that the prevailing economic problems, namely credit crunch, imbalanced supply and demand and channeling funds into speculative schemes, deprive market forces to determine the fate of economic parameters including, but not limited to, interest rates.

Noting that high deposit rates raise the cost of money, Pourfallah said “Any cut in deposit rates should equally serve the interest of manufactures regardless of their size.”

Earlier, the Economy Minister Ali Tayyebnia had called for considering deposit rate cuts along with lending rates. Tayyebnia, however, stressed that the MCC intends to lower rates on ‘’rational’’ grounds.

The MCC’s weekly meeting has been cancelled twice since November 24. The top policymaking body is expected to come up with a date for further cuts in interest rates, a move which has been welcomed by major banks. The council in mid-November had required the central bank to present a report on the probable consequences of further rate cuts. The CBI-affiliated MCC cut interest rates once in April by two percentage points, bringing deposit rates to 20%.