Rate Cut Benefits in Retrospect

EghtesadOnline: A few months into the implementation of a Central Bank of Iran directive that meant changes for the banking system, depositors and markets, the regulator’s deputy for economic affairs has deemed it a successful scheme for giving rise to positive results.

News ID: ۷۴۴۵۸۸

25 December 2017

On Aug. 23, the central bank issued a directive decreeing that as of Sept. 2, all banks and credit institutions are obligated to adhere to short- and long-term deposit rates set respectively at 15% and 10%, meaning that people effectively had 11 days to either renew contracts, choose short-term contracts with lower rates or move to other markets altogether.

“Every reform policy comes with costs and benefits and we wanted to implement this policy with the highest benefits and the lowest costs, which we believe did happen and the policy was successful,” Peyman Qorbani told Fars News website.

“If the central bank was to decrease deposit rates suddenly, it would have created unfavorable consequences for the banking system and other markets,” Financial Tribune quoted him as saying.

According to the official prior to the directive, short-term deposit accounts surged by over 50% while long-term one-year contracts grew by a meager rate of  under 5%.

In the past two years and as a result of the highly competitive atmosphere between the lenders to offer the highest rates, he said, people were mostly attracted to short-term accounts because in addition to offering high rates, they allowed the customer to have access to ready liquidity.

Stabilizing Effect

However, the 11-day window provided the people with an opportunity to “refer to the banks and categorize their deposits based on their own preferences”, which also led to a notable change in the composition of deposits in the banks whereby short-term deposits that previously held a 35.9% of all accounts declined to 25.2% in the month after the implementation of the directive, which later dwindled to 24.5%.

On the other hand, the share of long-term deposits in total deposits stood at 34.2% in the month before the implementation of the directive whereas it grew to 44.3% in the following month and currently reached 46.8%.

“Therefore, this measure led to an increase in the duration of deposits in the banking system and caused a positive reform to take form in the composition of deposits that also reduce the risk of fluctuations in other markets,” Qorbani said.

In addition to creating a setting in which long-awaited cuts to deposit rates could be realized, the measures paved “the way to decrease bank loan rates”.

Noting that central bank inspectors have conducted more than 5,000 surveys of bank branches to ensure the implementation of the directive, the official denied reports that private banks gained as a result of it.

“We witnessed a flow of resources from private banks toward state-owned banks,” he said.

The official noted that the fact that foreign exchange rates have gone up and the US dollar exchange rate is currently hovering at an all-time high of 42,000 has nothing to do with bank interest rates, but rather to the seasonal trend where the foreign currency rates go up around Christmas.

Vowing that CBI has the means and will continue to work for stability in the foreign exchange market, Qorbani concluded by saying that “a good balance currently exists among returns in the monetary and capital markets, as their rates are still higher than the inflation rate [of about 10%] and therefore remain appealing”.