Economy, Business And Markets

Markets Unfazed as Banks Prepare for Fresh Rate Cuts

Finance Desk
Markets Unfazed as Banks Prepare for Fresh Rate CutsMarkets Unfazed as Banks Prepare for Fresh Rate Cuts

It was late last month that Akbar Komijani, Central Bank of Iran Vice-Governor, addressing the 26th Annual Conference on Monetary and Exchange Rate Policies in Tehran, briefly alluded to closed-door negotiations among senior bankers mulling the possibility of further rate cuts.

Fast forward to Sunday June 12, news broke out that Bank Pasargad, a major private lender and Iran's second-largest bank, had voluntarily lowered its one-year deposit rates from 18% to 16%.

The announcement took market observers off guard because firstly no representative body for banks had publicly endorsed the decision, and second, the rate cut had come not through a central bank directive but a decision by the individual bank alone.

When CEOs of commercial banks announced a two-percentage point rate cut last November, it was the Money and Credit Council–a decision-making body – which finally approved the decision, causing furor among free-marketers who slammed it as another rate cut "by fiat."

News outlets on Monday reported that this time, too, a consensus has emerged among bankers to go ahead with another rate cut. Although MCC's approval will be essential for the decision to become legally binding, banks seizing the initiative to implement the rate cuts is in and of itself, is a welcome break with tradition in the banking system.

Banks' enthusiasm for lower rates would have seemed impossible a short time ago when the race to attract deposits was the order of the day. Up until the recent past, the army of unregistered credit institutions, emboldened by the policies of former president Mahmoud Ahmadinejad, was leading the banks into the dangerous game of luring more savings at any cost.

But that was then, this is now. The inflation rate is on the descending trajectory from a peak of plus 40% in 2013 to 11.2% this April and projected to anchor in single digits by the end of summer. The interbank rate, through the active intervention of the Central Bank of Iran, has gradually declined from the whopping 29% at the beginning of March 2015 to 17 % now.

However, as in the era of higher rates, analysts say banks are, and will be, the ultimate winners of lower rates. Lenders, saddled with high nonperforming loans, dodgy balance sheets and botched investment in the real estate, now have little option but to lower their returns on deposits in line with inflation.

But if there is a silver lining in all of this, it would the "aha moment" for banks and the regulator that market mechanisms should be king when it comes to setting rates. Kourosh Parvizian, head of the Association of Private Banks said on Monday that he was delighted that the "logic of the market" has ultimately prevailed and replaced the unwanted official decrees in determining rates. David Lipton, IMF's second senior official, told policymakers on a recent visit to Tehran that they should not push. He strongly recommended them to be calm and patient with deposit rates and let them come down gradually and naturally.

No Dramatic Shift  

Although the dust has yet to settle, the markets have more or less reacted lukewarmly to the news. It was widely expected that the lower rates would translate into gains for the equity market but the Tehran Stock Exchange is currently in the midst of a severe bear market.  On Sunday TSE shed 1,026 points or 1.35% to record its worst drop since April 16.

It is less likely to see a dramatic shifting of gears in the markets. The market outperformed on speculation and so far companies haven't seen any tangible results. Hence, "bears will keep dominating at least for a while," said Morteza Ramezanpur, head of int'l affairs at Amin Investment Bank, a firm with over $1.2 billion in assets under management.

Pouya Jabal Ameli, a central bank economist, is positive about any rate setting which is a "product of the market." However, he notes that the shift won’t really affect the financial markets as rates are "still hovering above inflation."

Although on Sunday the news of rate cuts temporarily impacted the forex market, offsetting the bearish trend for the US dollar, the greenback remained stable throughout the day, closing at 34,650 rials.

On Monday the greenback was traded at 34,580 rials in Tehran with euro selling for 39,120 rials. A foreign currency trader in central Tehran told the Financial Tribune that rate cuts would be a non-factor for the hard currency market.

The bullion market was also calm on Monday with Azadi gold coin selling at 10,302,000 rials recording a modest rise, after having posted its biggest monthly gain on Saturday when the benchmark coin gained 120,000 rials.