A banking official has warned that any intervention by the government to set the interest rate may be the repetition of past mistakes, referring to previous administration officials who manipulated the rates on several occasions.
The minister of economic affairs and finance recently announced that the Money and Credit Council is set to review the plan for reduction of the interest rate, which is now 22 percent for long-term deposits.
Ali Tayebnia said “the government is not in a position to set the rate through official instructions,” however he added that “we expect the interest rates to be decided given the economic situation,” implying that since inflation has been curbed, the interest rate should be reduced too.
Monetary experts, on the other hand, believe that the government’s intervention in this respect would feed rent-seeking activities.
Certain banking officials also believe that the Central Bank of Iran (CBI) should pave the ground for the interest rate to be set through a market mechanism, and not through government’s instructions.
In a recent interview with Eghtesad News, Kamal Seyed Ali, the former deputy governor of the CBI, who was recently appointed as the managing director of Iran Zamin Bank, believes that every time authorities, namely the Money and Credit Council and CBI, interfered in setting the interest rate, their decision damaged monetary transparency.
Seyed Ali admitted that the banking system should comply with the council and CBI but asserted, “The mechanism to set the interest rate should not give rise to further problems.”
He said such intervention in the past never succeeded in regulating or resolving the issues. “The previous administration reduced the interest rate for loans to as low as 12 percent, a move that led to significant growth in deferrals. In other words, loan recipients were reluctant to pay their debts, taking advantage of postponing settlement of cheap loans.”
Seyed Ali believes that in light of “recession in parallel markets,” it would be better for investors to deposit their capital in commercial banks and therefore urged the government to adopt an approach that encourages people to do so.
He said the interest rate must be set through a mechanism that boosts the banking system and helps the economy exit recession.
To this end, the CBI should take the initiative to encourage the banks to set “a fair and reasonable interest rate.”
The CBI is able to inject financial resources to the banking system in the form of credit line, he said.
