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Iranian Monetary Authorities Agree to Decrease Interest Rates

Feb., 2016

Vistar Business Monitor

As inflation has been curbed from over 40 percent to about 12 percent, the monetary authorities are moving now to help reduce the interest rates further in a move to boost the manufacturing sector.

Earlier in the year the Central Bank reduced the interest rates by two percentage point, but banks and credit institutions refused to respect the decision. So, the regulator decided not to order any extra decline in the interest rates, but it encouraged banks to reduce the rates in a gradual way. To give the banks an incentive, the Central Bank reduced the interbank interest by about 12 percent through market operations. The interbank interest rate is now about 18.5 percent from once over 30 percent.

Although the latter decision caused banks to reduce the deposit rate from 20 percent to 18 percent last week, one should pay attention that banks have had no other option to keep deposit rates high in the past few years as it was the only tool available for them to attract public capital.

According to the banks agreement the new rates will be implemented from the beginning of the next Persian calendar month of Esfand (starting February 20, 2016). Moreover the lending rate will drop from 21% to 20% and the partnership loans will also witness a 2 percent drop to 22%. The 3-month deposit interest rate will remain 10%.

This is the second decrease in the current Iranian Calendar Year (ending March 19, 2016), following the declining trend of inflation. In May 2015 the Money & Credit Council reduced the deposit interest rates from 22% to 20%.

In the recent past, banks were running out of resources due to the massive non-performing loans and high cost of the money. Additionally, the government had a huge debt to banks but had failed to repay. The Central Bank has tried in the recent months to reduce the interbank interest rate, further curb inflation, and inject money into the banking system in a move to support the commercial banks.

Since the implementation of the Joint Comprehensive Plan of Action, the Central Bank has tried to help the weak banking system with reconnecting them with the SWIFT system. As the Central Bank continues efforts to further curb inflation to 10 percent, banks are hopeful to reduce the interest rates even further. However, the government first needs to repay its debt to the banking system if it wants the banks to reduce the interest rates further.

The repayment of debt will help banks be equipped with fresh financial resources, which would be given as loans to businesses and the manufacturing sector. But it’s noteworthy that further decline in the interest rates could be dangerous given the fact that recession still persists. The released capital could have negative impacts on parallel money markets like the forex and housing markets, making them volatile again, like what happened in 2007 when home prices jump considerably due to a sharp decline in the interest rate.

If that happens, the Central Bank will face more serious problems than now, as the extra capitals could boost prices in the housing market, which is a main contributor to the inflation rate. And if the extra capitals enter the forex market, the difference between official and unofficial rates of the major foreign currencies will widen, making it impossible for the Central Bank to implement it plan of the unification of forex rates. So, it would be necessary for the Central Bank to stick to the policies which would help interest rates decline further.

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