Economy, Business And Markets

Rate Cuts: May be Another Time

Rate Cuts: May be Another TimeRate Cuts: May be Another Time

Economy Minister Ali Tayyebnia ruled out future cuts in interest rates in the foreseeable future due to the current state of the country’s financial markets.

“ Cutting interest rates is not possible for now as there is a high demand for money in markets, and the economy is struggling with high inflation, rising forex rates and sanctions on the banking sector,” IRNA quoted him as saying late Tuesday.

Earlier, commercial banks had agreed to lower deposit rates from 20% to 18%, however, the Money and Credit Council has been postponing the final decision for weeks without giving a proper reason or explanation. Rate cuts have both proponents and opponents in both the private and public sectors.

“Unauthorized credit institutions are also a major obstacle when it comes to lowering interest rates because they have (so far) refused to abide by the officially-set rates,” the minister said.

The CBI, assisted by a couple of law-abiding banks, is trying to address the problems caused by the unruly lending institutions seemingly with a lot of clout and their proximity to vested interests.

According to the minister, the government’s debts to the banking system now is in the region of 3.8 quadrillion rials ($125.4 billion).

Tayyebnia also noted that more capital should be injected into some state-owned banks. “While banks’ capital adequacy ratio should be 8-12%, the ratio for some is now 4%.”

The government has been “using bank resources to compensate the annual budget deficits in the last two years. Drawing on the financial resources of the CBI adds to the inflation rate.”

A big portion of the banks’ assets are locked in non-performing loans, the minister lamented. “This adds to disruptive operations in the banking sector, especially when every-day banking operations are not profitable.”

Lifting of the sanctions will be a major opportunity for banks and help them unload unnecessary assets, he said, adding that during the sanctions barely 15% of their assets were sold in auctions.  

 Interbank Rates

While MCC was expected to make the final decision on the plan for lowering interest rates, the council’s latest meeting only addressed interbank rates and again put the issue of interest rates on hold.

However, the CBI delivered a report on its performance in the interbank market to the MCC meeting late Tuesday, reporting that the it has lowered interbank interest rates from the 28% recorded in August to 21.5% in December.

CBI was tasked to regulate the interbank market and provide MCC with three-month performance reports, as a part of government’s monetary policies to stimulate the economy.