Effects of Rate Cuts Ambiguous
Economy, Business And Markets

Effects of Rate Cuts Ambiguous

Despite the implementation of the Money and Credit Council’s directive following the general agreement of lenders to lower interest rates from Feb. 20, misgivings abound over the feasibility of the move.

Commercial banks recently agreed to cut deposit rates in a move welcomed by the CBI and the MCC, after the lifting of economic and banking sanctions renewed hopes for less inflation and more growth.

Banks decided to cut their one-year deposit rate from 20% to 18% while the overnight deposit rate was reduced to below 10%.

The MCC, the country’s highest monetary policymaking body, also required banks to offer regular (non-Musharakah) loans and Musharakah (joint-venture) loans at approximately 20% and 22%, respectively. The council, earlier in April, had lowered the ceiling on lending rates to 22% and 24% – from a previous 27%.

According to two economists surveyed by eghtesadnews website, stimulating demand, easing the recession and promoting growth rates are the primary reasons why the CBI has been striving to cut the high rates.  However, its efficacy is under question.

“This program certainly will not be beneficial for the government; it was meant to lower production and trade costs by providing merchants and manufacturers with cheaper money; the primary goal is to pull the industries out of recession and to work as a stimulus for economy, “ Davood Souri, an analyst, said.

Pouya Jabal Ameli, an economist, holds an identical view saying that sluggish demand had necessitated the need for rate cuts which is expected to fuel both demand and investment.

 “The government is visibly hopeful about stimulating demand for manufactured goods and improve growth rates,” said Jabal Ameli, who also advises the Financial Tribune on economic and financial affairs.

 Will Not Create Jobs

However, he expressed strong reservations over the feasibility of the move saying that interest rate cuts do not necessarily contribute to higher consumer demand and much-needed growth rates.

He also dismissed those optimistic about the positive impact of lower rates on the employment figures – another major concern of the government struggling to expand payrolls and find permanent jobs for the army of unemployed, especially university graduates.

Nevertheless, he acknowledged that rate cuts would be good for the banking system. “Banks are having serious problems with their balance sheets, and high interest rates worsen the situation. Banks are suffering from a liquidity crunch and high rates would obviously increase their debts,” he said.

Elaborating further, he said, “If all the banks stick to the agreement (on lower interest rates) the rate cut will indeed be beneficial for their balance sheets” that are reportedly under the fatal burden of toxic assets, soured loans and high lending rates that most borrowers are unable and unwilling to pay.

“However, all banks do not feel bound by the agreement as they tend to attract more customers by keeping their deposit rates up, an unfair competition that undermines the viability of the agreement.”

If the rate cut decision had been deferred until the next fiscal year (starts March 20) it could have had been more effective, and the government could, realistically, expect increase in both demand and economic growth, he added, referring to the shopping and holiday season that marks the final days of the outgoing year that precedes Nowruz -- the Persian New Year.  

  The CBI decree on the lower lending rates, has in fact dashed hopes for the market to set deposit and lending rates. Some analysts, including Abbas Mousavian, who heads the CBI’s Fiqh Council, have argued that the MCC should have no role in setting rates. Others, however, insist that given the dire straits of the economy the market should not have the final say in setting or deciding deposit/lending rates.

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