Economy, Business And Markets

No Qualms About Easing Monetary Policy

No Qualms About  Easing Monetary PolicyNo Qualms About  Easing Monetary Policy

Minister of Economy Ali Tayyebnia says lowering deposit rates to 18% is "doable" and that interest rates will definitely be lowered.  

 “In tandem with the decrease in inter-bank rates from 29.5% to less than 19%, the deposit rates of banks will be lowered,” Tayyebnia said on the sidelines of the meeting of 'Public-Private Sectors Dialogue Council'.

Pointing to the decrease in bond yields from 21% to 19% in the equity market and the decline in inflation rates, Tayyebnia said, “Based on the decline in these variables, lowering deposit rates is inevitable and the process of cutting rates will continue in the future.”

Asked about the possibility of deposit rates falling to lower than 18%, he said the Money and Credit Council would have the final say on the highly sensitive issue.

MCC is composed of 11 members with voting rights and two observers from the economic and budget commissions of the Parliament.

The council members include the minister of economy, Valiollah Seif, governor of the Central Bank of Iran and Mohammad Bagher Nobakht, head of the Management and Planning Organization.

Mohammadreza Nematzadeh, the minister of industries, mining and trade, told the meeting that the Central Bank of Iran supports lower lending /deposit rates due to the decline in the inflation rate.

“The CBI has promised to gradually move interest rates closer to inflation rate,” he added.

According to the MCC-authorized rates, banks are allowed to offer loans at a maximum 24% and deposit rates at a maximum 20%.

Abdolnaser Hemmati, head of Public Sector Banks’ Coordination Council predicted that another rate cut will take place in May or June “bringing the deposit rates down to 16%.”

Banks' Consensus  

Iranian banks reached an agreement this week to lower time deposit rates to 18% from the current 20% and daily periodic interest rates to less than the current 10%. However, the new reduced rate for the latter was not specified.

“Following a meeting of senior bankers and central bank officials on February 13, lenders agreed to implement the new rates from February 20,” according to the text of the agreement made available to ISNA on Monday.  

The agreement points to the central bank's Jan. 20 directive that reemphasized the necessity for lenders to adhere to the official interest rates and asked them to prepare the grounds for further rate cuts.

“We will inform the Central Bank of Iran of the decision and ask it to monitor the proper execution of this measure by banks.”

On the instructions of the CBI's Money and Credit Council, lenders cut interest rates by two percentage points in April. But since the rates continued to be incompatible with the declining inflation, monetary officials said another rate cut could be announced before the fiscal year is out (March 19). The CBI had agreed to rate cuts last November but government officials later said the markets were not yet ready for another reduction in rates.

President Hassan Rouhani and Economy Minister Ali Tayyebnia have made known that the existing lending rates are too high and not in line with the inflation which has dropped to below 14% from a whopping 40% when Rouhani took office in the summer of 2013.

Addressing bankers at the weekend, the president said the high interest and deposit rates are "harming the economy." Advocates of lower rates say higher rates discourage investment and manufacturing as the people prefer to park their money in banks for higher returns. By the same token, businesses and manufactures are also averse to borrow at high interest rates, especially during recession and hard economic times when inventories are high and consumer demand low.


CBI Directive  

In a statement on Monday, the CBI welcomed the banking sector's   plan for lowering deposit rates, and called banks to refrain from offering higher rates.  

"Banks should stop offering daily periodic interest rates at a higher rate than the yearly rates and returns should be paid at the end of the contract period at fixed rates,” the statement said.  

The directive requires financial institutions under the supervision of the bank to do likewise.

“This decision of the banks is compatible with the current condition of the domestic economy and the significant decline in the inflation rate,” it said.

The regulator also called for a cut in banks’ lending rates following the deposit rate cuts, as “it would reduce banks’ expenses for attracting resources.”

The news of rate cuts got a mixed reaction in the local press on Tuesday, with some voicing skepticism that lenders would abide by the new rates. The economic daily Donyay-e-Eqtesad, criticized the move in a feature story, saying it could disrupt the "natural trend" that banks had started in gradually lowering the rates. It also raised fears over the possibility of capital outflow from banks as investors may seek more profitable but risky sectors for investment.  

Forex Rates


Tayyebnia noted the government believes in a system of “floating yet managed” forex rates and that forex rates should be determined based on supply and demand.  

“If the government or the CBI want to control volatility in the forex market it will be through buying and selling hard currency,” he added.

On the dual forex rates and the US dollar's exchange rate in the 2016-17 budget, he said that the greenback's rate in the draft budget has been set based on the expected volume of exports and oil prices. “The dollar rate in the budget does not mean that the government wants to push the greenback rate in the free market closer to the rate projected in the budget.”

The minister stated that forex rates should not be set at a level that will harm exports and production. “We believe in protecting the value of the rial and the best way to do this is by controlling inflation.”

Tayyebnia said that the point-to-point inflation rate has declined to lower than 10%. “As the inflation rate declines, all the other variables like forex rates, deposit/lending rates and the rate of wage growth should also be lowered.”