Iran's CB Again Raises Lower Bound of IRC

EghtesadOnline: The Central Bank of Iran again raised the lower bound of interest rate corridor (IRC) in the interbank market to further narrow the interbank interest rate spread.

News ID: ۷۵۰۶۹۹

15 August 2020

In a press release seen on its website, the CBI said it would raise interbank deposits by 1 percentage point to 14% starting today (Saturday).

The interbank deposit rate was initially set at 10% in May but the CBI increased it in three phases going up to 14% in line with monetary policy to control inflation through open market operations and the IRC. The upper bound of the IRC is now set at 22%.

IRC is a system for guiding short-term market interest rates towards the central bank target/policy rate. It consists of a rate at which the central bank lends to banks (typically an overnight lending rate) and a rate at which it takes deposits from them (deposit rate).

Under the IRC structure, the CBI sets the floor and ceiling of policy rates and lets other money market rates, such as interbank rate, move within this setup.

The CBI said that the current inflation rate is higher than the inflation target announced by the regulator. Overall average annual inflation was 26.4% in the 12-month period ending July 21, according to the Statistical Center of Iran.

Earlier in May, the CBI set the inflation target at 22% for the current fiscal year (March 2020-21).

“The decision [to raise deposit rates] was made to narrow the IRC spread and guide the inflation rate toward the set target,” the CBI notice said.

To realize its anti-inflation goals the CBI apparently has pinned hope on the OMO to manage and control interbank rates.

The OMO was set up in January as part of its monetary policy to help curb inflation, regulate interbank rates and improve management of money supply.

Within the OMO framework, central banks buy and sell bonds in the open market to increase or reduce money supply. They buy government bonds to increase the money base (cash reserves) and by extension curb inter-banking lending rates.  By the same token, selling government bonds reduces base money and raises interbank rates.

As per rules, lenders in need of liquidity will have to keep bonds as collateral with the CBI to borrow at 22%.

To deepen the bond market and ensure there are enough bonds in the market to implement the OMO, the CBI has launched a series of auctions since May to sell government bonds mainly to banks and credit institutions.

In the 11 auctions, the government sold bonds worth 530 trillion rials ($2.4 billion). The CBI has considerably increased the bond yields to attract institutions and retail investors. The highest yield now is 21% for bonds maturing in September 2023.